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Top Picks' Mid-Year Winners: Tal Education

07/05/2018 5:00 am EST

Focus: GLOBAL

Kuen (Scott) Chan

Editor, Investing Daily's Real World Investing

In MoneyShow's Top Picks 2018 report published at the start of the year, Scott Chan chose TAL Education (TAL) as his favorite stock for the year. Now up 30%, the editor of Investing Daily's Real World Investing updates his outlook.

The stock has had its ups and downs this year, but overall, TAL Education has had a solid 2018 so far. As of the end of June, the stock was up 24.6% for the year, which easily trumps the returns of the S&P 500 and the Hang Seng Index over the same period.

The gain includes roughly a 20% decline since TAL made an all-time high on June 8. The reasons for the decline are mainly twofold.

One, in general Chinese stocks are under pressure as a result of the uncertainty surrounding tariffs. Two, a research firm named Muddy Waters, known for short selling, accused TAL of overstating profits. 

On the first issue, since TAL’s customers are domestic students, the business doesn’t have direct exposure to tariffs. Of course, if the Chinese economy significantly slows, it could leave Chinese parents with less disposable income to spend on tutoring.

However, given the strong emphasis Chinese parents place on giving their children an educational edge, I believe TAL offers a degree of insulation against economic downturn. 

On the second issue, Muddy Waters is notorious for attacking stocks it is already short. It profits when the stock falls. Muddy Waters often targets Chinese stocks due to a certain stigma still surrounding them.

TAL has said that the allegations “numerous errors, unsupported speculation and malicious interpretations of events.” The company noted in its annual SEC filing that it has conducted a comprehensive internal review and found no evidence to support the allegations. I believe TAL should issue a more detailed response to refute the allegations.

TAL’s financial statements are audited and signed off by Deloitte Touche Tohmatsu, one of the Big Four accounting firms. In addition, many high-quality investment firms hold many shares of TAL. These companies with huge amounts of resources don’t spend millions on a stock unless they have looked under every rock. 

This doesn’t mean that there’s zero chance that TAL isn’t committing fraud, but you could say that about every company. The bottom line is the business is still growing quickly. The company’s latest quarter again easily beat expectations. I now rate the stock a hold.  

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