With the way the market has been faring lately, the scuffs that Apollo Investment (NASDAQ:AINV) took during its fiscal second quarter could be considered a victory. And given that the market's reaction has been to treat it like fellow financial services firms Blackstone (NYSE:BX), Merrill Lynch (NYSE:MER), Allied Capital Corp. (NYSE:ALD), and Morgan Stanley (NYSE:MS), an investment opportunity could be brewing.

Leading the bright spots for Apollo's quarter was net asset value (NAV) per-share growth of 14.3% over the same quarter last year. This compares to per-share NAV growth of 13% from September 2005 to September 2006. Operating activities were on the up-and-up, with investment income up 35% against a 19% drop in expenses. Net investment income improved 82% for the quarter and 77% for the first six months of Apollo's fiscal year.

This, however, brings us to the disappointing part of Apollo's report. Apollo's portfolio was not immune to the tough credit markets and changing economic conditions, and the company ended up writing off $56 million in unrealized losses in its investment portfolio. In addition, the euro, pound, and Canadian dollar all made unfavorable moves that lead to unrealized losses on Apollo's non-U.S. denominated borrowings.

Leading the portfolio write-downs were the subordinated debt notes for Natural Products Group (a.k.a. Arbonne Intermediate Holdco) and the sub debt and common equity in Lexicon Marketing. On the conference call, management said that Natural Products -- basically a multilevel marketing company for skin-care products -- had been growing at a pretty rapid clip, but has recently slowed substantially, leading to the lower valuation. Lexicon Marketing, which took a much more substantial hit, markets English as a second language programs, which management said have been hurt badly by the falling homebuilding market and tighter immigration control.

On the flip side, management was optimistic about some of the other portfolio holdings that experienced volatility during the quarter. Apollo was able to make additional investments in GNC, Infor Global, KAR Holdings, Thomson Learning, and TransFirst -- all at discounts to the original purchase prices. Among the new investments during the quarter were First Data and Alliance Boots, two buyouts led by KKR.

Overall, despite the write-downs during the quarter, Apollo appears to be on track and continuing to work on building long-term shareholder value. And with the decline in the stock that followed the earnings report, the stock is not only paying a dividend in excess of 10%, it's also trading at its current NAV per share.

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Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. Apollo is an Income Investor pick. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants ...