New Oriental Education: Strong Growth, Rising Profitability, And Attractive Valuation

Valuation should be interpreted in the proper context, and investors should always incorporate other return drivers into the equation. A company that generates strong profitability and above-average growth rates obviously deserves to trade at a higher valuation than a business with below-average profitability and mediocre growth rates.

However, it is not easy to incorporate multiple factors into the analysis and quantify them in order to see the complete picture. In that spirit, the PowerFactors system is a quantitative algorithm that ranks companies in a particular universe according to a combination of factors: financial quality, valuation, fundamental momentum, and relative strength.

Data from S&P Global via Portfolio123

The backtested performance numbers show that companies with high PowerFactors rankings tend to deliver superior returns over the long term, and the higher the ranking the higher the expected returns.

New Oriental has a PowerFactors ranking above 88, so the stock is solidly in the top quintile based on financial quality, valuation, fundamental momentum, and relative strength together.

Backtested performance data for quantitative algorithms should always be taken with a grain of salt. The backtested data shows that a large number of companies with high PowerFactors rankings tend to deliver superior returns over the long term, but this does not tell us much about how a specific company such as New Oriental is going to perform in a particular year.

In other words, the main strength of the algorithm is that it provides a quantifiable approach based on hard data to make investment decisions supported by evidence as opposed to opinions. However, the main weakness is that the algorithm does not consider the particular characteristics and the fundamental risks of different businesses when analyzing the numbers.

Those limitations being acknowledged, it is good to know that New Oriental still offers attractive upside potential from current levels if the company can continue meeting and ideally exceeding analysts' expectations.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in EDU over the next 72 hours.

Disclaimer: I wrote this article myself, and it expresses my own ...

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