The Risk/Reward Ratio Sets up a Perfect Trade Opportunity for CHK Stock

CHK stock - The Risk/Reward Ratio Sets up a Perfect Trade Opportunity for CHK Stock

Like many stocks right now, Chesapeake Energy (NYSE:CHK) has been nothing to write home about. Its performance has been dismal at best, with CHK stock falling ~20% from this month’s highs and 18.5% from its highs this summer.

Still though, Chesapeake Energy stock is presenting an interesting setup near current levels. With that in mind, let’s look at the charts before anything else.

Trading CHK Stock

chart of CHK stock price
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Source: Chart courtesy of

This chart is quite compelling for a couple of reasons. For starters, the 200-day moving average was once resistance, but is now acting as support. That was true last month and so far, it’s true in October.

Ideally, CHK stock would look better above $4.25, but near $4 isn’t the end of the world.

That’s as Chesapeake Energy holds its May gap-up, the backside of downtrend resistance (purple line) and uptrend support (blue line). I love that all these levels are converging into one mark, right near this $3.80 mark. It allows investors to buy CHK stock near current levels and bail on a close below roughly $3.75. That makes for an excellent risk/reward setup.

Should we get a rally over $4.25, look for Chesapeake Energy stock to test its 50-day and 100-day moving averages at $4.42 and $4.61, respectively. If it can clear those levels, it will put $5, then the 52-week highs near $5.60 on the table.

Keep oil prices in mind too. WTI crude is down more than 13% this month and a further slide would certainly hurt Chesapeake Energy stock. That’s despite hedging strategies and other energy considerations like natural gas. Natural gas prices have been rallying all month, despite the slide in energy prices. That said, a rally in energy could spur a rally in CHK stock as well.

Evaluating Chesapeake Energy Stock

Obviously Chesapeake Energy stock is not the highest quality name in the energy sector. It’s no Exxon Mobil (NYSE:XOM), BP plc (NYSE:BP), Schlumberger (NYSE:SLB), Pioneer Natural Resources (NYSE:PXD) or many others we could list. That said, it’s not the worst player in the game either.

Consensus estimates call for earnings per share of 79 cents this year and 83 cents in 2019. That leaves CHK stock trading at just five times this year’s earnings. Even though earnings growth has sort of stagnated in this level, at least we know we’re not overpaying for Chesapeake. On the revenue front, estimates call for a 2.3% decline this year and 4.2% decline in 2019.

Cash flow expectations for 2019 are looking up and Chesapeake will need that to be the case in order to pay down some of its debt load. Last quarter, the company was carrying $9.6 billion in short- and long-term debt compared to just $1.2 billion in current assets.

Look, I want to be clear. Taking a long position in CHK is more of a play on the stock setup and oil than it is on its fundamentals. We’re not talking about a multi-year position here, but we’re respecting the fundamentals and playing the charts. In that regard, it’s setting up as an attractive buy while the fundamentals continue to improve.

If investors want a better fundamental situation and less of a speculative play, they should consider stocks like Occidental Petroleum (NYSE:OXY), BP, XOM and others listed above.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

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