Seemingly everywhere you look, the fundamentals spell bad news for Chesapeake Energy (OTCMKTS:CHKAQ). Although oil has surged higher since its April doldrums, when prices briefly dropped below zero, momentum has now slowed to a crawl. That’s because with much demand, oil-based investments like Chesapeake stock are simply taking up oxygen.
Nevertheless, the newly tickered CHKAQ has provided substantial profitability for speculators who were brave enough to take the risk but also smart enough to get out to secure the cash.
Take, for instance, Chesapeake stock’s 59% leap on June 4 and 182% rocket on June 8 (see chart below). It’s enthusiasm like that which fuels the frenzy for CHKAQ within social media feeds and platforms popular with young, inexperienced investors, such as Robinhood. And I get it. I get the speculative itch from time to time. Further, as Kirk Ruddy, a former bankruptcy claims trader noted in a Bloomberg op-ed, “I have always thought people have a psychological urge to buy stocks at a low price.”
Though anecdotal, it’s not an unreasonable observation. Primarily, some of the hottest stocks in the markets right now are levered to bankrupt companies, including Hertz Global (NYSE:HTZ), Whiting Petroleum (NYSE:WLL), and JCPenney (OTCMKTS:JCPNQ).
While I get the concept of “buy low, sell high” vis-a-vis Chesapeake stock, at some point, you’ve got to wonder if gamblers will eventually be forced to sell at any price just to mitigate the damage.
Still, the stock formerly traded as CHK draws a crowd for one simple reason (besides its “paper” price): it’s not inconceivable for bankruptcy stocks to turn things around. Just ask Delta Air Lines (NYSE:DAL).
Chesapeake Stock Can Come Back but It’s Very Unlikely
The subject of its own comeback narrative, circa April 2007, Delta had the otherwise-unrecognizable DALRQ ticker symbol in the wake of its bankruptcy some 19 months earlier. At the time, rising fuel prices and competition from low-cost discount airlines significantly cut into Delta’s profits.
Also, a series of events took its toll on the company, from the Sept. 11 attacks to Hurricane Katrina. Management decided the best course of action was filing for Chapter 11 protection. Naturally, investor sentiment wasn’t all that great for DALRQ.
However, through some wheeling and dealing and elbow grease, Delta turned things around (until it hit the next crisis we’re still suffering from). But it’s this in-between profitability that attracts speculators of Chesapeake stock.
But as a 2007 MarketWatch article documented, the idea of gambling on bankruptcy stocks is nothing new. When it happened right before the Great Recession, it prompted John Nestor, director of public affairs at the Securities and Exchange Commission, to state, “It’s very unlikely that a company will come out of bankruptcy without canceling its shares, especially if they have filed a reorganization plan saying that’s what they intend to do.”
Adding further doubts to Chesapeake stock is a 2001 study co-authored by Philip Russel, assistant professor of Finance at Philadelphia University, and Ben Branch, professor of Finance at the University of Massachusetts, which found that investors who bought common stock in 154 bankrupt firms lost on average 70% of their investment. Worryingly, “Investors in 93 of the firms lost everything.”
You don’t want to be a negative Nancy, especially right now. Still, you’ve got to be realistic. Yes, some names like Delta have crawled out of bankruptcy and succeeded pre-pandemic. But that doesn’t guarantee Chesapeake stock anything, I’m afraid.
CHKAQ is a Self-Fulfilling Prophecy … Until it Isn’t
Typically, popular online brokers prohibit short-selling of over-the-counter stocks. But even if it were convenient to do so, I wouldn’t short Chesapeake stock despite my skepticism. As I’ve learned, Robinhood and other popular platforms have tremendous sway. Frankly, you don’t want to get in front of this train.
You’ve got to recognize the unique situation we’re in. Up until recently, the government was bankrolling unemployed people to stay at home, many of whom made more money not working than working. Plus, with so much time on their hands — and that includes the folks who are “working” remotely — gambling on penny stocks is a quick fix.
Ultimately, though, I’m staying away from Chesapeake stock. As I stated above, the demand just isn’t there. At time of writing, air passenger volumes are below 30% of their year-ago capacity. Also, high automotive traffic areas such as Los Angeles are seeing more than 60% less congestion compared to 2019.
Until that narrative changes, you can chat up CHKAQ all you want. It will move higher probably until that fateful day when it won’t.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.