The energy sector has been a minefield amid the novel coronavirus. It’s hammered both high-quality stocks and those on the ropes. Take Chesapeake Energy (NYSE:CHK) for example. With looming bankruptcy risk, CHK stock recently engaged in a 200-for-1 reverse stock split.
That really should be the only information investors need at this point. Healthy companies engage in regular stock splits to lower their stock price. They do this as investors continue to bid their equity prices higher, splitting them to keep them from ballooning up to the figures we see with Amazon (NASDAQ:AMZN) stock.
However, only unhealthy companies engage in reverse splits. They do this to engineer a higher stock price, and it’s usually done so to stay in compliance with the exchanges. It’s an even worse sign when investors see a reverse split as large as 200 for 1.
Consider this. CHK stock rallied over 15% on Monday and closed at $12.49 per share. On a pre-split basis, that values the stock at about 6.2 cents per share. So while one may glance at Chesapeake at $12, it’s not the same after a reverse split. The stock price has been engineered higher.
Just Leave CHK Stock Alone
There’s no other way to put this: CHK stock isn’t worth your time or investment.
Chesapeake is virtually priced for bankruptcy — and that should be a pretty good sign that it’s one to avoid. But because anything short of bankruptcy could send the stock flying higher, that’s the draw for some investors. They are looking to cash in on a massive move.
I say, why gamble with the bankruptcy risk when it’s much easier to pick winners? Amazon stock is up 49% from the lows. Even just a “regular” stock like Home Depot (NYSE:HD) is up 75% since March.
There are a few areas that are really struggling, and energy is one of them. Those looking for bargains in this area may feel most comfortable in oil majors like Exxon Mobil (NYSE:XOM) or a sector allocation like the Energy Select Sector SPDR ETF (NYSEARCA:XLE). That way investors don’t carry the single-stock risk of a company like Chesapeake.
Allow me to make just one other point. While crude oil prices have come surging back from the lows, CHK stock hasn’t. Sure, shares were up 12.5% or so on May 18. But the stock hit new all-time lows just two sessions prior to that.
A rebound in oil prices, in stocks prices and virtually everything else is doing very little to help Chesapeake at this point.
Will Chesapeake Energy Survive?
On May 11, the company reported earnings. But in this case — with solvency on the line — it’s not the headline numbers that matter all that much.
The company reported current assets of $1.8 billion, up from $1.25 billion in the prior quarter. However, current liabilities weighed in at a higher figure, sitting at $2.26 billion. When current liabilities top current assets, there is concern about whether the company can cover its short-term obligations.
At the end of the quarter, Chesapeake had total assets of $7.8 billion, down significantly from $16.2 billion in the prior quarter. On the flip side, total liabilities of $9.5 billion edged up slightly from the prior period. Like the reverse split, almost all you need to know is that long-term debt of $9.2 billion towers over Chesapeake’s $120 million market capitalization.
Further, the company states that it doesn’t expect to be in compliance with financial covenants starting in the fourth quarter, and it just reported Q1 results. Finally, “management has concluded that there is substantial doubt about the company’s ability to continue as a going concern.”
So maybe CHK stock pulls off a miracle, but Wall Street isn’t expecting it. There are thousands of stocks to choose from. Go with one of quality.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.