Four Stocks to Teach the Market a Lesson

What happens when no more jobs are available? For many Americans, it’s the perfect time to go back to school. That means Apollo Group (APOL), DeVry (DV), Corinthian Colleges (COCO), Career Education (CECO) and other educational providers could benefit despite the global economic crisis. So, what’s the best way to play these trends and profit in a tough market?

The Apollo Covered Call

Apollo Group recently announced fourth quarter profits that nearly doubled from a year ago. Management believes that it will see higher starts/enrollments while it aims to cut costs to improve the bottom line. Analysts are also decidedly bullish, with Credit Suisse raising its target to $88 from $75, noting demand for the educational institution’s services continues to benefit while management streamlines expenses.

Apollo’s options also present a compelling play for conservative investors looking to establish a position. The $75 January 2009 calls are trading at a premium of $5.50 per contract, which means investors writing a call at today’s price would receive a 5.35% return on their investment in just under ten days. Higher returns can be realized by using long-term options as a stock substitute.

The $70 August 2009 options, which don’t expire for another 225 days, are trading at a premium of $18.10 per contract. This means that investors can establish a position for $1,810 that they can then write $550 worth of short-term options against. The return on this trade is 30.3% in under ten days. The downside is that you may have to sell the stock or close the position and accept any downside.

Essentially, investors are purchasing $1,810 worth of rights, transferring the rights for a 30% return, or being stuck with the stock if all else fails. Options premiums are almost always high for a reason, but investors looking to establish a long-term position either way can’t go wrong! See “A Better Covered Call Alternative” for more information on this strategy.

An Easy Way to Leverage

Investors looking to build a leveraged position in the sector without buying stock on margin may also want to consider using long-term options, called LEAPS, as a stock substitute. These options offer investors the long-term right, but not obligation, to buy shares at a preset price. Since the required capital is lower, a more diverse set of companies can be purchased while losses are capped at the premium amount.

Career Education – The $10 January 2010 LEAPS calls are trading with an ask price of just $9.50, which means that investors can purchase the right to 100 shares anytime over the next 372 days for just $950 versus buying the stock for $1,783. The breakeven point is then $19.50 per share.

Corinthian Colleges – The $7.50 January 2010 LEAPS calls are trading with an ask price of just $9.60, which means that investors can purchase the right to 100 shares anytime over the next 372 days for just $960 versus buying the stock for $1,597. The breakeven is then just $17.10 per share.

Disclosure: No position in stocks mentioned.

Comments

[Dan Weiss:]

I like your strategy but I am not a fan of COCO or CECO in the sector. DV, ESI or STRA are much stronger players in the education industry without the issues that COCO and CECO have faced in recent years. STRA is a bit expensive for my taste but DV or ESI could be nice setups.

Jan 12 01:02 PM