Apollo Group's Earnings Could Turn Bears Into Buyers

Joseph Hargett
June 30, 2011
Apollo Group's Earnings Could Turn Bears Into Buyers

For-profit education firm Apollo Group Inc. (APOL) is slated to release its fiscal third-quarter earnings figures after the close of trading tonight, with Wall Street expecting a profit of $1.33 per share for the period. Historically, Apollo has bested the consensus estimate in each of the prior four reporting periods, with an average upside surprise of nearly 14%.

Despite this solid fundamental backdrop, there is a heavy degree of negativity levied against the security. For instance, short interest rose by more than 22% during the most recent reporting period. As a result, nearly 7% of APOL's float is now sold short.

The brokerage community is also betting heavily against the security. Heading into tonight's report, 13 of the 23 analysts following APOL rate the stock a Hold, versus 10 Buy ratings, according to Thomson/First Call.

Rounding out the stock's sentiment backdrop is a hefty degree of negativity from options traders. In fact, APOL sports a single-session front-month put/call volume ratio of 0.95 so far in today's trading. In other words, speculative investors have been equally interested in bearish puts as bullish calls heading into APOL's earnings report.

Digging a bit deeper reveals that peak front-month put open interest of 5,319 contracts lies at the deep out-of-the-money July 38 strike. Other notable accumulations of put open interest include the July 42 strike, which sports 4,595 contracts, and the July 50 strike, with 4,422 contracts.

By comparison, the notable call strikes include the July 50 call, 10,544 contracts, and the July 44 strike, with 3,840 contracts.

Technically, APOL deserves much of its negative sentiment backdrop. The shares have declined steadily beneath their 50-day moving average since November 2010. The security recently broke out sharply above this trendline, pulling back to test the area for support. With the bar set extremely low for APOL's earnings report, and a potential area of technical support below the shares, the path of least resistance appears to be to the upside.