This morning, TAL Education (TAL), our longest and most-profitable holding, came under attack by Muddy Waters, a firm that specializes in publishing negative research on a company and selling its stock short. MW’s spokesman Carson Block released a long video summarizing his firm’s research into what it describes as TAL Education’s fraudulent sale and re-purchase of a couple of smaller companies. According to Block, TAL has used this trick to inflate its bottom line.
As with other such short-selling attacks, I have no real opinion on the merits of Block’s allegations. My concern is that TAL took a 12% dive shortly after today’s open.
The portfolio still has a huge profit in our half position of TAL, but some of our subscribers may have bought more recently and are more vulnerable to a big drawdown like this.
Fortunately, TAL got a grip pretty quickly, finding a bottom at 39 and recovering to support at 40 and above.
The reaction from institutional investors in the last couple of hours of the trading day will still be very important, as they often wait until then to execute their trades.
My inclination is that, if the market continues to discount the Muddy Waters allegations, this pullback may be an opportunity to fill our position in TAL.
I’ll move TAL to a Hold rating as a precaution, but will keep monitoring the stock’s movement very closely.