In Greek mythology, Apollo was the god of the sun. But yesterday, for-profit educator Apollo Group (NASDAQ:APOL) more resembled another figure from Greek lore -- Icarus, the young lad who made wings of wax and feathers, flew too close to the sun, and plunged to his death when the wax melted.
Like Icarus, Apollo Group has flown pretty high in its day, coming awfully close to breaking $100 per share earlier this year before getting singed in the growing regulatory scandals affecting its peer for-profit educators, notably ITT Educational Services (NYSE:ESI), Corinthian Colleges (NASDAQ:COCO), and Career Education (NASDAQ:CECO). The last time I wrote about Apollo, it had hit a bit of a downdraft that cost it 25% of its market cap, pulling it down to about $75 a share and putting it on this Fool's radar as approaching "value investment" levels. Alas, in the ensuing months Apollo soared back up to the mid-$80s and out of reach.
But like Icarus, every time Apollo reaches for the sky, it seems to suffer from the very success that first made investors willing to accord it a triple-digit trailing price-to-earnings (P/E) ratio. When a company is that highly valued, it doesn't take much of a misstep to bring its price crashing down. Indeed, as shown by Apollo's performance on its earnings report card yesterday, it sometimes doesn't take any misstep at all. A simple decline in its stellar outperformance can do the trick.
In Apollo's case, the company got a serious case of sun poisoning in punishment for beating the Street's consensus earnings estimate by "only" a penny, earning just $0.58 per diluted share after growing its quarterly earnings 30% year-on-year. Bad Apollo! Shame on you.
Actually, it's not the company that deserves the blame here. It's performed admirably in the past, and continues to do so. If there are fingers to be pointed, they should point at Apollo's investors. Whether you fancy yourself a "value investor" or a "growth investor," there's just no excuse for running around buying stocks valued at a price-to-earnings-to-growth (PEG) ratio of 3.4. That's just asking for trouble.
And while we're at it, shame on investment bank Merrill Lynch (NYSE:MER) for leading investors to destruction by recommending they "buy" Apollo at this crazy valuation. Good as Apollo is, it was overpriced at half its current valuation. By waiting until the company hit its 3.4 PEG before downgrading it to "neutral" yesterday, the bank just added insult to injury, giving the market one more reason to knock Apollo down by the 6% it wound up losing for the day.
Apollo's a great company and a wonderful business success story. One day, it will sell for a price that gives it a chance of becoming a rewarding investment for Fools. In the meantime, take some time to educate yourself about the company's recent performance:
- It's "Show Me" Time at Apollo
- Has Apollo Landed?
- Apollo's Apple
- Apollo Deserves Laurels
- Showtime at the Apollo
Fool contributor Rich Smith has no position in any company mentioned in this article.
