Activist Short Rumors Swirl Around Apollo Education Group Inc

Activist Short Rumors Swirl Around Apollo Education Group Inc

After agreeing to acquire South African Milpark Education for $25.6 million, Phoenix-based Apollo Education Group Inc (NASDAQ:APOL) CEO Greg Cappelli didn’t have much time to relish in the victory as rumors of activist shorts in the stock swirl.

Apollo Education’s tock down 7% as revenue just slightly misses while profits surge

Stock in Apollo Education Group Inc (NASDAQ:APOL), the parent of the University of Phoenix, was down near 7% mid-morning, trading near $28.

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The sudden price move in Apollo Education Group Inc (NASDAQ:APOL) comes as revenue expectations slightly missed yet profits where higher.  The firm reported adjusted second quarter earnings to 28 cents a share on revenue of $689.4 million.  While the bottom line results were ahead of FactSet analyst’s consensus of 19 cents, which should be significantly positive, the stock slid. Revenue missed slightly, at $679.1 million versus $689.4 million expected.  For the year the company estimates $3 billion to $3.1 billion in revenue while analysts are expecting $3.06 billion, which is right on the money.

Not bad numbers.  So why the price drop?

Activist short rumor on heavy volume

Speculation is activist short sellers have entered the stock, but this Wall Street banter may be missing an important point. With over 3 million shares traded, nearly double the daily average all before lunch, the stock could be experiencing block trading that is being disguised.

Activist hedge funds typically establish their short positions over time so as not to tip-off the market as to their intentions. Sometimes, however, hedge fund managers like to sell into positive news or indications of mainstream acceptance. Such might be the case with a recent brokerage outperform rating on the stock.

Stock down after brokerage “outperform” rating reaffirmed

Going against the grain of selling was a May 20 “outperform” rating from BMO Capital Markets. Issued shortly after the Milpark Education acquisition, the reaffirmation of the “outperform” rating was light on details concerning the acquisition price paid for Milpark, but heavy on public facts, such as the 15,000 students at Milpark and the fact it sells bachelor’s degrees in business administration/commerce, master’s degrees in business administration, post-graduate diplomas, and specialized certificates.

Just days before the stock sell-off, the BMO report concluded “We maintain our Outperform rating though and believe the stock should react favorably due to the exposure to a new growth market.”

Pay attention to category selling

While Apollo Education Group Inc (NASDAQ:APOL) was down nearly 7%, watch the category as DeVry Education Group Inc (NYSE:DV) is down nearly 1% on the day.  On a comparative basis, DeVry can be construed as having delivered more powerful earnings as of late.  A category short sell, as opposed to an individual activist hedge fund targeting one firm, would be in place if DeVry started to fall along with Apollo.  Today’s trading patterns in the stock indicate this could be an individual targeting of Apollo that could eventually impact the entire category if the activist attack is on the entire business model.  If that attack remains focused on Apollo management, the contagion of category selling might not spread.

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)
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