Is Chesapeake Energy a Good Portfolio Play?

With shares of Chesapeake Energy (NYSE:CHK) trading around $27, 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:

T = Trends for a Stock’s Movement

Chesapeake is involved in the acquisition, exploration, development, and production of natural gas and oil properties in the United States. As the world continues to grow, energy is at the root of this expansion. In order for countries to build infrastructure, machinery requires energy products and services. Look for this company to capitalize on the growth of the world as it provides a product that is essential to development.

An overhaul of the operations at Chesapeake Energy in 2013 is expected to pay dividends for the Oklahoma City-based company in 2014. Doug Lawler took over as the company’s chief executive in June and immediately began making some changes to the company’s free-spending ways. It’s starting to pay off, and the general outlook for the company is positive. Chesapeake’s margins are improving and per-unit production costs are decreasing. Capital expenditures have been reined in, and assets have been shed. And those efforts will continue in 2014, analysts project. Chesapeake also is expected to rely more heavily on operating cash flows to fund drilling spending — a stark contrast to the Chesapeake of old when racking up debt was the norm.

T = Technicals on the Stock Chart Are Strong

Chesapeake Energy stock has been in a range over the last couple of years. The stock is currently trading sideways. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Chesapeake Energy is trading above its rising key averages, which signal neutral to bullish price action in the near-term.

CHK

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Chesapeake Energy options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Chesapeake Energy options

30.18%

96%

93%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

January Options

Flat

Average

February Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Chesapeake Energy’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Chesapeake Energy look like and more importantly, how did the markets like these numbers?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-1229.17%

-48.84%

118.18%

-29.94%

Revenue Growth (Y-O-Y)

63.87%

37.95%

41.55%

29.74%

Earnings Reaction

-6.78%

7.08%

-1.79%

-0.24%

Chesapeake Energy has seen decreasing earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have been pleased with Chesapeake Energy’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Chesapeake Energy stock done relative to its peers, BP (NYSE:BP), ConocoPhillips (NYSE:COP), Anadarko Petroleum (NYSE:APC), and sector?

Chesapeake Energy

BP

ConocoPhillips

Anadarko Petroleum

Sector

Year-to-Date Return

64.74%

15.63%

20.90%

6.54%

27.95%

Chesapeake Energy has been a relative performance leader, year-to-date.

Conclusion

Chesapeake Energy provides access to valuable and essential energy products around the world. The company is expected to pay dividends for the Oklahoma City-based company in 2014. The stock has been in a range over the last couple of years and is currently trading sideways. Over the last four quarters, earnings have been mixed while revenue figures have been rising, however, investors in the company are pleased about the most recent earnings announcement. Relative to its peers and sector, Chesapeake Energy has been a year-to-date performance leader. Look for Chesapeake Energy to continue to OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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