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I decided not shorting EDU

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at this time.

New Oriental EDU logo

I was excited about shorting EDU or APPL (buying puts) after Tuesday’s MacWorld keynote and New Oriental disappointing earning news. I hoped to cover some of my loss from LFT (and to a less content CROX) by shorting the stocks, now that the market appears controlled by the bears. So I went and told my wife about the drop of New Oriental stock, broken shoes (CROX) vs. broken school (EDU) analogy, my wife said this:

“so now you are going to Du Da Xiao (a form of gamble in China), huh?”

So much for my fundamental analysis. Seriously I decided not to short the EDU due to two things:

1) In order to short a stock, I need to have Margin account. I did send the margin applications on Tuesday. But I decided to pull the application today, as I read more about it, and the story about Berkshire Hathaway stock once dropped more than 50%. Hypothetically, a person who bought BRK.A in its earning days won’t get the huge gains of BRK.A because he/she got margin call. Here is the story in Chinese. Quote here:

巴菲特2007年10月18日在接受福克斯新闻网商业频道的专访时,曾就“如何看待通过融资来购买股票或者说借钱买股票?”说:“我认为这有点疯狂。如果你看看伯克夏公司,我们买入的时候是7美圆/股,现在每股是129,000美圆。但在1974年期间,它的股价下跌了50%,2002年时,股价也从高点大跌50%。如果你的资金中有50%是通过融资获得的,则意味着你已经破产了。但你不应该因拥有一只从7美圆涨至129,000美圆的股票而破产。1987年,伯克夏的股价在两周内下跌了40%。因此,如果你通过融资来买股票,你的命运就掌握在他人的手里,这太疯狂了。”

2) I think New Oriental long term will still be bright: from English training to college preparation, from kids (pre-school) English to college education, adults education, it’s expanding very fast.

Nobody can predict the near term stock prices. But in the near term, the company can do things to boster the stock price (such as stock buy back). I think if the shorts are very successful, EDU will drop from mid 60s to mid 40s, about 50% profit. But that’s in a perfect case scenario. Since the company already guided lower and has plenty of deferred revenue, the shorts better not betting on the next earning report.

1 reply on “I decided not shorting EDU”

[…] A short while ago I decided not to short EDU. Today the EDU stock buy back program confirmed my reasoning. Here is their buy back plan (CNNMoney): New Oriental Education & Technology Group Inc. (NYSE:EDU) Thursday said its board had approved the buyback of 1 million American Depositary shares. The program is effective between Feb. 25 and Dec. 31, 2008. […]

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