All stock trading involves risk. Yet, some investments are riskier than others, and Chesapeake Energy (NYSE:CHK) offers a volatility profile that’s almost unmatched among famous names. Not that this makes CHK stock “un-investable.”
It’s just not the type of asset that you’d want to “load the boat” on, so to speak. However, if you listen to some commentators, you’d think Chesapeake is the worst company in the world.
And indeed, the long-term price action on CHK stock might provide fodder for their argument. Just a few years ago, it was hard to imagine that the shares would fall below $50. Now, there’s talk of the stock going to zero. Is this a fair call, or just an overreaction?
The Scariest Phrase Ever
When Chesapeake recently warned investors that the company might not be able to continue as a “going concern,” social-media pundits had a field day. This happened in the midst of the oil-price rout. Everybody and his uncle had an opinion on where CHK stock was headed, and those opinions were mostly negative.
As it turns out, there’s no shortage of verbal ammunition for Chesapeake critics. Even before the oil-price crash, Chesapeake was barely breaking even financially. During the company’s most recently reported quarter, it lost $8.3 billion.
That’s a staggering number for a company with a market capitalization of just $94 million. It also didn’t help when Chesapeake withdrew its financial outlook. Granted, the fiscal impact of the spread of the novel coronavirus has caused a number of companies to withdraw their forward guidance.
Still, the withdrawal of the company’s guidance only provided more ammunition for CHK stock bears. On top of that, Chesapeake said that it’s analyzing “all available strategic alternatives.” And we all know what that could mean, don’t we?
Without explicitly saying it, Chesapeake’s verbiage raises the possibility of bankruptcy proceedings. Yet it’s the phrase “going concern” that scared everyone the most. Absolutely no one on the long side of the trade wants to hear those words.
When Analysts Attack
So naturally, the ongoing selloff in CHK stock picked up steam after the company issued that horrendous phrase. And as we might expect, analysts came out in full force to critique the company and downgrade the stock.
UBS analyst Lloyd Byrne, for instance, lowered his price target on CHK stock to just $5, representing a 75% price-objective reduction. Byrne also reiterated his “sell” rating on the stock.
And if you think that’s harsh, check out what CFRA analyst Paige Meyer had to say about the once-mighty energy company:
“We do not expect [Chesapeake] to be in compliance with its financial covenants beginning in Q4 2020, which would result in an act of default on the credit facility … With a default on the credit facility, we believe other lenders are likely to call debt due as well using ‘cross default’ clauses.”
The subtext here, evidently, is that the “act of default” would likely be the beginning of the end of Chesapeake. Moreover, Meyer’s price target for CHK stock makes Byrne’s $5 look generous.
While Meyer’s previous price objective for the stock was an already-low 30 cents, she revised it to zero. And with Chesapeake’s net debt totaling $9.5 billion at March’s end, Meyer’s prediction, sadly, could turn out to be accurate.
So now you’ve seen what the critics have to say, along with the numbers to back up their assessments. Their argument does hold weight. But then, it’s also true that CHK shares went from $8 and change on May 14 to over $12 on May 18.
And so, it’s probably best to view the stock as a trade rather than as an investment. Holding on to CHK stock for more than a few days or weeks is, given the currently available data on the company, an unfavorable proposition.
The Takeaway on CHK Stock
As an investor, you don’t always have to heed the critics’ warnings. But if you’re thinking about holding CHK stock for a while, you might want to weigh their arguments. After all, we wouldn’t want to put a price target of zero on your portfolio.
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.