We recently started a series called “Penny Stock of the Day”. These ideas are geared for traders with an extremely high risk appetite.
Our Penny Stock of the Day is chosen by screening for stocks under $5 and then applying technical analysis on the shortlisted set of penny stocks showing unusual volume. When making these trades, please make sure to pay vigilant attention to pricing moves and have a strict stop loss in place to avoid significant losses.
Penny Stock of the Day: New Oriental Education & Tech Grp (NYSE: EDU)
Today’s penny stock pick is the provider of private educational services in China, New Oriental Education & Tech Grp (NYSE: EDU).
New Oriental Education & Tech Grp provides private educational services under the New Oriental brand in the People’s Republic of China. It operates through K-12 AST, Test Preparation and Other Courses; Online Education; and Others segments.
The company offers test preparation courses to students taking language and entrance exams used by educational institutions in the United States, the People’s Republic of China, and the Commonwealth countries; and after-school tutoring courses for middle and high school students to enhance their exam scores, as well as for children to teach English. It also provides language training courses, including English, as well as other foreign languages, such as German, Japanese, French, Korean, Italian, and Spanish; operates a full-time private primary and secondary school in Yangzhou seeking a full curriculum with a focus on English; develops and edits educational materials for language training and test preparation; and offers online education programs that include college, K-12, and pre-school education. In addition, the company offers overseas studies consulting and overseas study tour services.
Website: https://www.neworiental.org/english/
Latest 10-k report: https://www.sec.gov/ix?doc=/Archives/edgar/data/0001372920/000119312521282201/d159008d20f.htm
Analyst Consensus: Based on 1 Wall Street analyst offering 12-month price targets for EDU in the last 3 months, the stock has an average price target of $3.50, which is a nearly 51% upside from the last close.
Source: TipRanks.com
Recent Analyst Ratings | Source: TipRanks.com
Potential Catalysts / Reasons for the Hype:
- News that New Oriental has recently established a human resources training company and a unit that will teach coding. It is rumored that the company is also planning to manufacture e-learning devices that would contain some of its existing educational materials.
- Upcoming earning report.
- Rumors that the Chinese government has granted license to EDU that would allow them to profit from adult tutoring and to do after-school tutoring for kids on a non-profit basis.
On analyzing the company’s stock charts, there seem to be multiple bullish indications…
Bullish Indications
#1 Formation of Consolidation Area: The daily chart shows that the stock is currently forming a consolidation area, which is shown as a pink color rectangle. Once the stock breaks out from this consolidation area, it can move higher.
EDU – Daily Chart
#2 Bullish ADX and DI: The ADX indicator shows bullishness as the +DI line is currently above the -DI line, and the ADX line has currently started to move higher from below the +DI and -DI lines.
#3 Price above M0s: The stock is currently above its 50-day SMA, indicating that the bulls have currently gained control.
#4 MACD above Signal Line: In the daily chart, the MACD (light blue color) is currently above the MACD signal line (orange color). This indicates a possible bullish setup.
#5 Bullish Stoch: The %K line is above the %D line of the stochastic in the daily chart, indicating possible bullishness.
#6 Above Support Area: The weekly chart shows that the stock is currently trading above a support area, which is marked as a purple color dotted line. This is a possible bullish sign.
EDU – Weekly Chart
#7 Bullish Stoch: The %K line is above the %D line of the stochastic in the weekly chart as well, indicating possible bullishness.
#8 Bullish MACD: The weekly chart also shows that the MACD line (blue color) is currently above the MACD signal line (orange color). This is a possible bullish setup.
#8 Oversold RSI: The weekly chart shows that the RSI is currently moving higher after reaching oversold levels, indicating that the stock could surge higher.
Recommended Trade (based on the charts)
Buy Levels: If you want to get in on this trade, the ideal buy level for EDU is above the price of $2.55.
Target Prices: Our first target is $4.00. If it closes above that level, the second target price is $5.00.
Stop Loss: To limit risk, place a stop loss at $1.80. Note that the stop loss is on a closing basis.
Our target potential upside is 57% to 96%.
For a risk of $0.75, our first target reward is $1.45, and the second target reward is $2.45. This is a nearly 1:2 and 1:3 risk-reward trade.
In other words, this trade offers 2x to 3x more potential upside than downside.
Potential Risks / Red Flags:
- Hedge Funds Decreased Holdings by 132.5M Shares Last Quarter.
EDU – Hedge Fund Holdings and Sentiment
- The new CCP regulations are not favorable for foreign investors, and the company can no longer raise capital through IPOs or overseas investments or use VIEs (variable interest entities) to circumvent this.
- It is rumored that all education companies in China are set to become non-profit soon.
- Already, New Oriental Education & Technology Group can no longer offer classes with content in advance of or outside of the current school curriculum. It also cannot hold classes during break periods, holidays, and weekends. This is due to the “Beijing Measures” agreement. Beijing Municipality Government and the Beijing Municipal Committee of the Communist Party of China had jointly issued the “Beijing Municipality’s Measures to Further Reduce the Burden of Homework and After-School Tutoring on Students in Compulsory Education in Beijing”. The Chinese government had ramped up its regulation of private tutoring businesses in the country to ease the cost of raising children, part of a broader effort to boost the country’s low birth rate.
- The company has competition from the likes of TAL Education Group (NYSE: TAL) and Gaotu Techedu Inc. (NYSE: GOTU).
As you can see, today’s featured penny stock offers big upside potential… but it also comes with a number of risks and red flags. As always, when dealing with penny stocks, we advise caution before entering into such high-risk ventures. Remember to think before you trade… understand the risks… and if you decide to trade, stick to your stop-losses!
Happy Trading!
— Trades of the Day Research Team
READ BEFORE TRADING PENNY STOCKS: The allure of penny stocks lies in their potential to deliver massive gains in a short period of time. However, in exchange for that opportunity, most penny stocks carry tremendous risk. They can be extremely volatile and are susceptible to “pump and dump” schemes and fraud.
Unlike regular stocks, the financial condition of most penny stock companies can be extremely difficult to analyze, as the majority of such stocks are traded on over-the-counter (OTC) exchanges, which are typically less transparent and less regulated than the major exchanges. In fact, in the penny stock space, it’s often easier to spot warning signs and red flags than it is to identify a sound investment. Nevertheless, we do our best to identify short-term trade opportunities in this exciting space because we know some of our readers are looking for high-risk, high-reward ideas. We just urge you to make sure you fully understand the risks before making any of these trades.
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