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Time to Sell TAL Education (TAL)?

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Tao Value, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here. A return of -2.07% was delivered by the fund for the Q2 of 2021, trailing the MSCI All Country World Index that delivered a +7.11% return for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.

In the Q2 2021 investor letter of Tao Value, the fund mentioned TAL Education Group (NYSE: TAL), and discussed its stance on the firm. TAL Education Group is a Beijing, China-based educational technology company, that currently has a $3.9 billion market capitalization. TAL delivered a -91.48% return since the beginning of the year, while its 12-month returns to are down by -91.93%. The stock closed at $6.30 per share on August 10, 2021.

Here is what Tao Value has to say about TAL Education Group in its Q2 2021 investor letter:

"On detracting side, our largest loss came from our recent new education positions, TAL. New legislation on both private K9 education & private tutoring materialized in the past quarter, and they turned out to be irrationally harsher & broader than anticipated. When such worst scenario fold out, the prospects of the company undoubtably has changed significantly. Although I believe that market overreacted on this company, it appears that I have made a mistake underestimating the regulatory impact and picking it up too soon. Our position sizes reflected my evaluation of the risk, and I decide to stay put."

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Based on our calculations, TAL Education Group (NYSE: TAL) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. TAL was in 38 hedge fund portfolios at the end of the first quarter of 2021, compared to 29 funds in the fourth quarter of 2020. TAL Education Group (NYSE: TAL) delivered a -88.35% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage.

Disclosure: None. This article is originally published at Insider Monkey.