New Oriental Education & Tech (NYSE: EDU) stock has managed the interesting feat of falling some 13% even as the price rose 868% (at pixel time). This is not what EDU was trying to achieve at all but it is what has happened. The little secret is in how the market is supposed to respond to stock splits and their reverse, consolidations.
New Oriental’s business is, as some put it, in flux. It’s the largest private educator in China and that’s something of a problem when the Chinese state has said that it would much rather – although such polite instructions hit with rather more vehemence inside China – that there was not private sector K-9 education in China. So, back in summer last year the stock plunged and there’s been a certain searching for what the company might o in hte future. The net is being cast wide as to what that might be too. Foir the period to November 2021 there was a loss of $876 million. That’s a decent slice out of anyone’s hide.
It’s not, particularly, expected that the situation is going to improve for the whole year results to May 2022. As a result New Oriental stock has been grumbling along in the $1.20 to $1.40 range for some months now.
This produces a problem. There’s no particular reason why this should be so but it is so. Americans tend to think that the “right” value for a stock price is in the $10 to $100 range. So, if a stock price goes above that there are stock splits – Amazon, Tesla and Google have all just done this. If the price goes below $1 for any particular length of time then it’s possible to lose the listing – it’s 18 months on NASDAQ for example. So, if this happens, or even is likely to happen, then we get reverse stock plits – consolidations to the British.
All that’s changed is the number of shares. Where there used to be 100 shares there might now be 1,000, or only 10 – a 10 for one stock split of a 10 for 1 consolidation or reverse stock split.
That this is just fashion is shown by the way that London share prices tend to be in the £1 to £10 range and we see splits and consolidation to keep them in that range often enough. This is also why US ADRs of London stocks are often 10 shares to one ADR.
New Oriental Education saw that stock price bumbling along just above that $1 level and decided to have a 10 for 1 consolidation. As a China but NY listed share this is actually just the ADS noiw representing 10 underlying New Oriental Education shares instead of the previous 1.
At which point the New Oriental stock price should rise 1,000% of course. It’s the same company it was yesterday, just fewer pieces of paper making up the ownership. Except that’s not what has happened – the stock is up on 868% at pixel time, this equating to a 13% price decline as a result of the reverse stock split. This isn’t what was intended of course, but it is what has happened. What happens next rather depends. Perhaps people will realise this and bid up New Oriental that 13% loss. Or perhaps the very consolidation has focused attention on the core business and what’s being seen isn’t encouraging. Which way next for EDU stock depends upon that collective view.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.