Pearson shares are up 25% since the market correction! Should I buy now?

Why have Pearson shares rallied since the market correction? This Fool looks at the educational provider in more detail and recent events.

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Pearson (LSE:PSON) has seen its shares rally since the stock market correction back in March. Is it too late to buy Pearson shares or could there still be an opportunity? Let’s take a closer look.

Why did Pearson shares rally?

Pearson is best known as an international publishing house, but it actually makes most of its money as the world’s largest educational provider, through e-learning and training materials.

So what’s been happening with Pearson shares recently? Well, as I write, the shares are trading for 769p. At this time last year, the shares were trading for 838p, which is an 8% fall over a 12-month period. The shares were on a downward trajectory and fell to 606p when the stock market correction occurred in March. The shares have rallied 25% since that point to current levels.

I believe the Pearson share price rallied due to a rejected takeover bid worth £7bn from private equity firm Apollo Global Management. Two further offers from Apollo were also rejected as management at Pearson thought both offers undervalued the business. This has led to increased confidence in the stock and has helped drive the price up in recent months, in my opinion.

Risks of investing

I must be wary of solely looking to add a stock to my holdings because the shares are rallying on the back of a failed takeover bid and management’s confidence of future growth. That would be a risky strategy. Furthermore, the educational market is saturated and competitive, with many players jostling for market share.

Another issue I must note is the current cost-of-living crisis, which could affect Pearson’s performance. Consumers may look to cheaper, more accessible alternatives rather than established providers like Pearson. This could hurt financials and investor returns.

The bull case and my verdict

One of the positives I note with Pearson is its current market position, profile and presence. It has an extensive reach and it can leverage this position to boost performance, financials and potentially investor returns in the long term.

Next, I like the fact Pearson is moving with the times and looking to move its products and services online. From an investment perspective, this is a shrewd move as it will only increase its cash generation and profitability. Increased profitability could result in increased investor returns.

Looking at Pearson’s past performance, I saw that 2020 was a difficult year due to the pandemic. Performance bounced back in the year ending 2021, to grow revenue and profit and decrease debt levels. I do understand that past performance is not a guarantee of the future, however.

Finally, Pearson shares pay a dividend that would boost my passive income stream. Its current dividend yield stands at just less than 3%. I am aware that dividends can be cancelled at any time, however.

I think Pearson shares still have some room to grow and I would add the shares to my holdings. The share price increasing in the past three months isn’t the reason I would buy the shares, however. Pearson’s performance record, dividends, market position, and growth prospects drive my decision here.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Jabran Khan has no position in any of the shares mentioned. The Motley Fool UK has recommended Pearson. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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