It’s no secret that the summertime is a particularly tough time for the stock market. This is the time of year when many Wall Street professionals and European investors go on vacation, so there are notoriously thin market conditions. And some short sellers take advantage of this to pick off stocks.
It’s never fun to see one of your holdings get picked off by short sellers. However, I want you to know that, if it happens, you don’t need to panic…as long as you’re investing in fundamentally rock solid companies. Sometimes, the short sellers don’t get it right. And that’s exactly what happened this week with one of my favorite Chinese stocks.
Let’s take a look.
Two weeks ago, shares of TAL Education Group (TAL) plunged nearly 20% after a short seller from Muddy Water Research claimed that the Chinese education company had “fake financials.” Carson Block claimed that TAL Education Group has misstated its earnings for fiscal year 2016 through fiscal year 2018. During the two year span, Block stated that TAL Education Group exaggerated its pretax profits by 28.4%, as well as boosted its operating profit by 21% and net income by 43%.
TAL Education Group did not take the allegations lightly. The company immediately issued a statement, noting that there were several errors in the short seller’s claims, as well as unfounded speculation and a “malicious” explanation of events.
TAL Education Group’s board also immediately initiated an internal review, and the results of this review were revealed this week. As I expected, TAL Education Group didn’t find any evidence that supported Muddy Waters’ allegations.
These accusations were baseless and simply another example of a short seller taking aim at a stock that’s been performing phenomenally this year. Carson Block is not a fan of Chinese companies, and he decided to attack the company, given the stock’s more than 350% surge in the past two fiscal years.
The reality is that TAL Education Group has superior fundamentals. For the current quarter, which will be announced in late July, sales are forecast to soar 59.8% year-over-year to $514.45 million. First-quarter earnings per share are expected to jump 60% year-over-year to $0.08 per share. And analysts have revised estimates slightly higher in the past two months—this suggests that TAL Education will beat expectations, just as it has for the past two quarters.
It’s not every day that you get a golden buying opportunity handed to you on a silver platter. But that’s exactly what is happening with TAL Education Group. TAL is one of my A-rated holdings in my Breakthrough Stocks newsletter—since I added it in May 2017, the stock has surged over 80%!
But there’s still time to buy TAL. Now that it has knocked the short seller down a peg, I look for TAL to rebound from its recent pullback and retrace its steps to new all-time highs. So, if you haven’t bought it already, here’s your opportunity. I consider TAL an A-rated Strong Buy.
The bottom line is that when a short seller takes aim at one of our holdings, don’t panic. Instead, take a closer look at the company’s fundamentals. Review the latest analyst commentary and estimates. You can do this by running your holdings through my Portfolio Grader stock rating tool. Unfortunately, there are unscrupulous short sellers out there, so it pays to do your research before reacting to their claims.