It’s a stark reminder that the only real floor for stocks is zero. Just when contrarian traders thought it was safe to buy the dip in Chesapeake (NYSE:CHK) stock, the share price tumbled once again. As I’m writing this, it’s down more than 5%.
Granted, the overall market sentiment hasn’t exactly been risk-on. The energy sector has been hit especially hard by the spread of the coronavirus from China. Still, there are red flags that make CHK stock particularly unattractive.
Bonds Tell the Tale
There’s an old saying that still holds true today. If you want to know how the stock market is really doing, check the bond market.
It has also been said that the bond market is the “smarter money” compared to stock traders. And it may be true that bond traders are a more sophisticated group on the whole.
When a company’s bonds lose value quickly and sharply, that can be a major red flag. Too few stock market traders pay attention to this. Chesapeake can serve as a lesson for investors. It’s a hard lesson for folks who already owned shares.
A number of energy sector companies offer bonds and have experienced price declines in those bonds. Chesapeake is just one of those companies. However, Chesapeake’s bond-price rout has been extra painful.
On March 6, Chesapeake’s most-active 2021-maturing bonds were worth $41.18 on average. That was a Friday. By the following Monday, the average price of those same bonds was $11.44. This magnitude of price decline gives a whole new meaning to the phrase “junk bonds.”
Was this a harbinger of worse things to come for Chesapeake and its investors? Diamond Hill Capital Management chief investment officer Bill Zox made his opinion loud and clear on this matter saying, “There is a certain subset of energy companies like Chesapeake that will not survive.”
These Signs Say Stay Away
When existential questions arise, it’s usually time to just bail on a company as an investor. As long as Russia and Saudi Arabia continue to battle over oil production, Chesapeake shareholders will be caught in the crossfire. And there’s really no way to accurately predict how long that battle will persist.
Instead of speculating over the outcome of the oil-price war, we can instead choose to look at the hard facts. At 21 cents per share, CHK stock had coughed up 93% of its value in 12 months. This awful milestone also marked the stock’s worst single-month price performance since the shares first began trading in February of 1993.
That’s not a good sign. And in case you’re collecting red flags as a hobby, Chesapeake has revealed its intention to reverse-split the stock. Some traders might view this as a desperate measure to keep the share price higher than it otherwise would have been.
Worse yet, it has been announced that the stock will be delisted from the S&P MidCap 400 index. And to add insult to injury, MKM Partners analyst John Gerdes has gone so far as to reduce his price target on the stock to zero.
The Takeaway on CHK Stock
There’s no need to be a hero when it comes to CHK stock. The zero price target might seem a bit harsh. But that’s just one of many warning signs. It’s conceivable that Chesapeake is a crumbling company. And it’s not our job, as investors, to try and put Humpty Dumpty back together again.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, he did not hold a position in any of the aforementioned securities.