I know we have a lot going on but there is one stock that I have been watching this week that really looks ready to fold like a cheap lawn chair. Many of you have probably heard of the company before and I’m sure you have seen the commercials for online education popping up like mad lately. I’m also sure that many of you have heard about the proposed $150 billion education stimulus package.
Obama’s budget means that most of the nation’s nearly $90 billion in student lending will run through the direct-loan program run by the U.S. Education Department. Stocks of “non-profit” and “for-profit” education providers slipped on the news. Many of these stocks have fallen dramatically since the news but some have held up better than others.
For instance, Sallie Mae (SLM, $3.38, down $0.60) which is a “non-profit” entity has dropped over 50% in less than two weeks, falling from a high of $8.89 to nearly $3. The one stock I am targeting is Apollo Group (APOL, $66.79, up $0.28) which is a “for-profit” business and runs numerous educational programs and services at high school, college, and graduate levels. Perhaps you have heard of The University of Phoenix, Inc.?
What has been interesting with Apollo’s stock is that it held up pretty well until yesterday when shares broke below $70. That is when my “Watch List” alerted me of the stock. I’m not sure if the “for-profit” stocks are supposed to benefit from the package at the expense of the “non-profit” businesses but what really got me interested in shorting Apollo was the shady business practices and lawsuits I have been reading about. Type in “Apollo Group Lawsuits” in a search engine and you will some interesting stories.
Student lenders were embarrassed by a scandal in 2007 that revealed some had given money and gifts to college financial aid officers to A-B-C (Always Be Closing…) business and these stocks were punished back then. As for Apollo, there are allegations of misconduct and “boiler room” practices which are locked up in lawsuits.
In fact, there was a lawsuit that was re-filed back in January that portrays this unmistakable “boiler room” work environment. The former employee claims that he was harassed because he would not commit “unlawful acts” in recruiting students. The suit also confirms that his salary was based on enrollment goals. Apollo Group has said they do not pay their enrollment counselors incentive compensation for performance.
What is really a red flag is the amount of insider selling that Apollo’s management has dumped over the past 3 years. Sales are in the hundreds of millions of dollars while at the same time, the company continues to delay the inevitable court cases that are on its agenda. This could get messy.
The U.S. Education Department is set to assess the value of $2.5 billion of government guaranteed student loans being funneled through Apollo and that could also get interesting. Given the current crackdown environment that the government had bestowed on Wall Street, this could really get interesting if some of the company’s officers are found guilty of engaging in unethical practices.
I could go on and on but after doing some chart work, I’m convinced that Apollo Group could be headed for a major sell-off. The stock recently broke through its 100-day moving average and is poised to bust below its 200-day. Where there is smoke, there is usually fire and I’m getting that feeling with Apollo.
If the stock breaks through this level, there is very little support at $60 which could lead to the low $50’s. That is asking a lot but check out the chart and you will see what I’m talking about. If you need help, email me and I’ll send you the link…
The March 55 puts (OAQOK, $0.70, down $0.25) are a possibility but they expire in two weeks. There were 3,300 contracts that traded hands on Thursday and the high was $1.25. If the stock can get to the low $60’s today or by early next week, these options could easily double.
The April 55 puts (OAQPK, $2.80, down $0.30) traded 750 contracts and were at $3.40 when the stock fell below $65. They lost a little mustard but they have a longer expiration period. I’m targeting the low $50’s for the shares by then and if this holds true these put options could also double.
Both contracts are risky, especially the March 55’s which, if you did enter a position, would have a short time frame for a trade. Maybe buy them on Friday and get out by next week. The one thing I should point out is that there are a slew of analysts who love the stock and bulls like it as a counter-recession play. You could use the March 75 calls (OAQCO, $1.10, down $0.05) for protection as a 1-to-2 cover ratio.
The April put options give us 7 weeks for some action. Also realize that holding any options over the weekend is sketchy so you will have to confirm the stock’s direction throughout the day. Try and get in the March puts for under a $1, the April puts under $3, and make sure the stock is in a downtrend.
Of course, these trades are time and news driven but I’m not sure if we need any news to make this stock head lower. It’s already in the process.
Friday is going to be a busy day for me so I’m not sure of when I’ll post but I will try and update you as best I can. If I don’t post, be sure to check your email inbox Sunday night for the Weekly Wrap. If you haven’t signed up, enter your email address above and to the right of this page.
Until then…yawl have a good weekend!
Rick Rouse
Rick@OptionsMentoring.com
