Will Chesapeake Energy Stock Outperform?

With shares of Chesapeake Energy (NYSE:CHK) trading around $24, 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.

Chesapeake Energy has ended its legal battle to retain leases for natural gas drilling on properties across New York. The state has postponed extraction of natural gas from its portion of the Marcellus Shale, which is among the biggest gas deposits in the United States. Gov. Andrew Cuomo has issued a moratorium on hydraulic fracturing.

T = Technicals on the Stock Chart are Strong

Chesapeake Energy stock has been rising over the last several months. The stock is now trading near highs for the year and it may keep going. 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

35.15%

20%

18%

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

Put IV Skew

Call IV Skew

August Options

Flat

Average

September 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 minimal 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 Mixed 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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

-48.84%

118.18%

-29.94%

-359.35%

Revenue Growth (Y-O-Y)

37.95%

41.55%

29.74%

-25.32%

Earnings Reaction

7.08%

-1.79%

-0.24%

-7.87%

Chesapeake Energy has seen mixed earnings and rising revenue figures over the last four quarters. From these numbers, the markets are excited about Chesapeake Energy’s recent earnings announcement.

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

48.47%

-0.86%

14.83%

19.38%

13.94%

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. A recent legal battle has ended that looks to favor the company. The stock has been trending higher in recent years and is now trading slightly below highs for the year. Over the last four quarters, earnings have been mixed while revenue figures have been rising, however, investors in the company are excited 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.

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