NEW YORK (TheStreet) -- Alarming news from New Oriental Education (EDU) is driving American for-profit stocks Bridgepoint Education (BPI), Apollo Group (APOL), Corinthian Colleges (COCO) and Devry (DV) lower.If you're a current New Oriental Education investor, Tuesday's earnings must have you scratching your head. New Oriental Education reported impressive beats on the top and bottom lines. Unfortunately, shares gapped lower and not higher. New Oriental Education is a Chinese company, but investors are liquidating the entire space. (See my recent article
New Oriental Education has lost about 30% of its market cap from Monday's close. New Oriental Education disclosed on its website they are the target of an active SEC investigation. According to the website: "On July 13, 2012, the Company was informed that the U.S. Securities and Exchange Commission (the "SEC") had issued a formal order of investigation captioned 'In the Matter of New Oriental Education & Technology Group Inc.' The Company believes that the investigation concerns whether there is a sufficient basis for the consolidation of Beijing New Oriental Education & Technology (Group) Co., Ltd., a variable interest entity of the Company, and its wholly-owned subsidiaries, into the Company's consolidated financial statements. The Company intends to fully cooperate with the SEC in its investigation." Only two sentences in an earnings report that is otherwise glowing with positive results. No one wants to read "SEC investigation" about their stock, especially one based in China. New Oriental Education may not know the full details of the investigation, but there is one thing we do know. The SEC is suing auditors for not providing audit documents. TheStreet's Timothy Collins recently called EDU a short candidate.
If you are anticipating Tuesday's drop in price to signal a buying opportunity, you may find the end of the day Wednesday or opening on Thursday better than Tuesday. There is no hurry jumping on board with New Oriental Education. Stocks dumping as a result of news like this can continue to fall for a long time. Take your time and do your homework before allocating capital here. Look for a second break above $20 as the one that "sticks." You may have a long wait before New Oriental trades above $20, however.
The other education stocks will likely bounce back quickly as investors formulate the issue is isolated to New Oriental Education. I entered into a long position with Bridgepoint Education by selling put options. At the time of publication the author was long BPI. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.