With shares of Chesapeake Energy Corporation (NYSE:CHK) trading at around $20.70, is CHK an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement
For a long period of time, Founder and CEO Aubrey McClendon was a superstar. However, he’s now about as reveled as Barry Bonds. Mr. McClendon founded Chesapeake Energy in 1989 and built something that at the time would have been deemed impossible. Now, he’s a man stepping down from his own company – effective in April – with his head held low.
That said, it’s okay to leave with your head down if it could possibly mean avoiding trouble with the law.
McClendon has been accused of antitrust violations and overstepping boundaries that led to personal gains. In regards to the latter, he supposedly arranged to personally borrow more than $1 billion from EIG Global Energy Partners, which is a big investor in Chesapeake. As the story goes, McClendon would receive the loans through shell companies in which he had a 2.5 percent stake. These 2.5 percent stakes were allowed because of a controversial Founders Well Participation Program. Because of this program, Mr. McClendon would be offered a 2.5 percent stake in every well drilled by Chesapeake. All that said, up until this point, the board’s probe has led to no findings of improper conduct.
As an investor, the key here isn’t whether or not Mr. McClendon is innocent or guilty, but that he is stepping down. This drama has taken away time and focus. With Mr. McClendon out of the picture, Chesapeake will have an opportunity to focus on business again.
It’s worth noting that there were several large insider purchases over the past six months. It’s possible that some people knew what was ahead. This once again proves the power of large insider buying when it comes to prophecy. The accuracy rate isn’t perfect, but it’s still extraordinary.
An embattled and unpopular CEO stepping down doesn’t necessarily mean great fortune in the future. Let’s take a look at the big picture for Chesapeake prior to forming an opinion. ..