Houston, Apollo (APOL) Has a Problem

April 3, 2011, 9:09 am

The bulls got off to a slow start as they let the bears take the early lead at the open. Futures were pointing towards a flat to slightly higher start but turned negative after our morning update. Economic news was light before the bell and some of the weakness at the start can be attributed to the S&P/CaseShiller Home Price Index which came in at 3.1% for January. The report showed home prices fell in 19 of the 20 largest U.S. cities tracked by the index.

After the open, the Consumer Confidence Index for March also came in worse-than-expected at 63.4. The suit-and-ties were looking for a print of 65. The March reading was also less than the upwardly revised 72 posting that was registered for February.

Despite the news, the market has chugged higher.

The Dow is up 67 points to 12,264 while the S&P 500 is higher by 6 points to 1,316. The Nasdaq is showing an 18 point pop and is at 2,748.

One stock we want to cover today is Apollo Group (APOL, $39.35, down $3.00) which is down 7% after reporting earnings that missed Wall Streets expectations. The company reported a loss of $64 million, or $0.45 a share, versus a year-earlier profit of $93 million, or $0.60 a share. Excluding the write-downs and estimated litigation losses, earnings would have been $0.83 a share. Revenue fell 2% to $1.05 billion.

Analysts were looking $0.69 a share on $1.03 billion in revenue.

We have been following Apollo for years and we have been pretty brutal on the companys past shenanigans. We have covered their boiler room atmosphere on how their counselors were pushing these college loans on anyone and everyone because they were funded by the government.

These types of colleges have been around for years and we are sure you have seen Apollos University of Phoenix ad promoting a student in her pajamas taking online courses. To make a long story short, many of the students are spending the grants elsewhere or paying bills and dont seem too worried about paying back the money.

We profiled a strangle option trade on Monday morning for our Watch List for Apollo Group and here were our thoughts:

“ Apollo reports earnings on Tuesday. We hate the stock and would think a break below $40 is coming. However, Apollo doesn’t always trade this way despite being shady which is why we listed this as a strangle option trade. We are tempted to make it a 2-to-1 put ratio trade but we will probably stay on the sidelines altogether.” (END)

We profiled the April 41 puts (APOL110416P00041000, $2.15, up $0.65) and the April 45 call (APOL110416C00045000, $0.05, down $0.98) which were going for $1.00 and $1.25, respectively. The puts opened at $3.05 and have traded up to $3.20 today which was more than enough to make this a very profitable trade.

Although we haven’t officially released these kinds of strangle option trades for 2011, yet, we have used them in the past. Once we get into April, we are expecting these types of trades to work well during earnings season.

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