Leave Chesapeake Energy to the Traders

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In the week ending May 8, Chesapeake Energy (NYSE:CHK) shares rose nearly 3%. The beleaguered energy company moved in tandem with other oil stocks as the price of oil moved higher. However, in the last month alone, CHK stock has dropped over 50% amid reports that a bankruptcy is imminent.

Chesapeake Energy Stock Might Make a Huge Comeback
Source: Novikov Aleksey / Shutterstock.com

Energy stocks that are tied to the price of oil face problems on a number of fronts. First, they face sagging demand from the airline and cruise line industries. And second, they face declining demand as more Americans continue to stay home. And this means that the world is awash in oil.

Given enough time, the supply/demand imbalance should work its way back to some sense of normal. But how long will it take for that to happen? Particularly if reopening the economy takes longer than many expect.

With that said, a bet on Chesapeake Energy is a bet on the price of oil. And that seems like a risky bet.

Oil Prices Are Stabilizing

I don’t think many serious investors felt that oil would stay at its absurdly low levels. The trading quirk that took the futures contract below $0 was just that. And traders were profiting as the price of oil climbed to over $20 a barrel.

By now, investors know the story. There’s way too much supply that is in place because demand was largely destroyed when many countries issued shelter-in-place restrictions that has kept drivers at home.

Any bullish argument for buying CHK stock would be based on the assumption that oil prices will move significantly higher. And while that may be the case a year from now, it does not appear oil prices will move higher fast enough to keep Chesapeake out of bankruptcy.

But Demand Remains Uncertain

One reason for this is that nobody knows when demand will return to pre-pandemic levels.

A recent Gallup poll suggests that the majority of adults who are working from home would like to continue to do so as much as possible even as the economy reopens. Some are concerned about their health. But others say they are happier and more efficient by simply avoiding the daily commute.

But the ability to work from home is a white-collar issue. Many of the over 20 million Americans who found themselves unemployed due to the pandemic are in blue collar jobs and cannot work from home. However, there is an additional headwind. Some of these jobs, particularly in the restaurant industry may not be coming back.

Add to this that the airline industry is a key driver of oil demand, as are cruise ships. Nobody knows when demand will return to anything resembling pre-pandemic levels.

When you put all of this together, oil prices face a long, difficult road.

Even Millennials Are Staying Away from CHK Stock

When a stock falls as low as CHK stock has, it sometimes draws the attention of investors who trade with the Robinhood app. Robinhood is popular among millennials. But CHK is not included in a quick scan of the 100 most popular stocks trading on the app.

Lest you think I’m exaggerating. Luckin Coffee (NASDAQ:LK) makes the list and it’s not even trading. Another name that is high on the list of most popular Robinhood stocks is Inovio Pharmaceuticals (NASDAQ:INO).

Robinhood investors are willing to accept some level of speculative risk. What does it say that even investors who are more comfortable taking on some additional risk are negative on CHK stock? I think it says that they can look at the math of supply and demand and know that gambling on Chesapeake stock is a bad bet.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/chk-stock-is-trade-not-investment/.

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