Chesapeake Energy Corporation (CHK) Stock Is a Buy — Here’s When to Pull the Trigger

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Many investors may feel they’ve missed the move in Chesapeake Energy Corporation (NYSE:CHK). After all, Chesapeake stock was up 6.8% Tuesday and is now up almost 8% over the past three days. That just adds to its recent rally, which now boasts a nearly 15% gain over the past month. So is it time to buy CHK stock or have investors missed the boat?

Although the recent surge in CHK stock makes it feel like the train has left the station, there could still be time to buy. Shares are actually down 13% on the year, while CHK’s 52-week high of $8.20 is still 30% away.

Given that Chesapeake is a natural gas and oil company, its stock is correlated with those energy markets. Unfortunately, oil and natural gas prices are down on the year, but both have rallied from the March lows.

While oil could suffer a pullback, I think the commodity’s price actually looks pretty bullish.

For investors willing to take on some risk, CHK stock could be the way to go. Chesapeake has made a lot of changes to its capital structure. While it has resulted in sharply lower revenues over the past two years, profitability is improving. In 2014, the company earned $1.9 billion on $23.1 billion in revenue. But by 2015, that slumped dramatically, with sales falling to $12.8 billion and net income plunging to a $14.6 billion loss.

In 2016, though, Chesapeake was showing life. While generating revenues of $7.9 billion, the company “only” lost $4.4 billion that year. This year, earnings are expected to be positive, with analysts looking for earnings of 75 cents per share. If momentum continues, analysts expect earnings of a whopping $1.16 per share in 2018.

Earnings of 75 cents and $1.16 per share may not seem like much. But for a $6 stock, that makes it extremely undervalued if it comes to fruition.

So Should You Buy Chesapeake Stock?

Investors willing to take on more risk for more reward should consider buying CHK stock. While the company still carries a high debt load  — about $10 billion as of last quarter — it has made an effort to reduce this amount.

Let’s make no mistake; Chesapeake isn’t perfect. There’s a reason the stock is down about 80% from its 2014 highs. But for investors, this could represent opportunity now that changes have been made.

Admittedly, production levels are down significantly. But this is because of divestitures that Chesapeake had to make. Thanks to its new structure and current assets, CHK has a very low cost of production. This will be incredibly important as production growth increases quarter by quarter, as margins will be more attractive.

This will boost the company’s net income and increase cash flow, allowing it to pay down debt and boost its bottom line. For shareholders, that will be important to see. It’s also encouraging that in mid-March, two insider executives plunked down cold-hard cash to buy the stock in the $5 range.

If all goes right, CHK stock presents investors with an attractive risk/reward.

So How Do You Play CHK Stock?

Chesapeake stock CHK stock
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Source: stockcharts.com

The stock has quickly shot above three main levels, the 50-, 100- and 200-day moving averages. This shows strength, but after a more than 20% rally over the past few weeks, waiting for a pullback seems prudent.

It would be more ideal if investors can buy the stock between $5.75 and $6. If that’s the case, they could use the recent low — around $4.75 — as their stop-loss. They could then target $8 as their upside and reassess the position if it hits that point.

This offers investors a concrete plan and disciplined approach for investing in Chesapeake stock. I believe that commodity prices are going higher and therefore CHK should too under its new structure. Chesapeake is in a better position now and if the pieces fall into place, its stock will be a bargain.

For those who want safer plays in the oil field, upside likely exists too. Stocks like Chevron Corporation (NYSE:CVX), Exxon Mobil Corporation (NYSE:XOM) and Pioneer Natural Resources (NYSE:PXD) could rally should commodity prices hold support and/or continue higher.

As of this writing, Bret Kenwell didn’t hold a position in any of the aforementioned securities.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/chesapeake-energy-corporation-chk-stock-buy/.

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