Investors could build a bearish or bullish case on Chesapeake Energy (CHK). The bears could contend that its debt levels are very high and that it is facing a liquidity crunch as evidenced by the sales of what could be construed to be very valuable assets, such as the sale of its Pipelines. Some analysts are putting the shortfall as high as $10 billion. Selling the pipelines could actually add to its cash-flow problems going forward as it would eliminate a steady stream of dependable income that is not affected by the underlying commodity. Finally, investors are far from happy with the way the company has been mismanaged by McClendon.
The bulls could contend that the worst news is already priced in. The stock is trading over 50% below its August 2011 highs and from a contrarian perspective it could make for good play as the majority seem to despise it.
Some other reasons to be bullish:
- Cash flow per share has increased from $5.07 in 2009 to $6.11 in 2011.
- Sales increased from $7.7 billion in 2009 to $11.6 billion in 2011.
- It has a low payout ratio of 16%
- A projected 3-5 year EPS growth rate of 8.44%
- A strong quarterly revenue growth rate of 50%
- The percentage short of the float 14.9% and this makes it a pretty good candidate for a short squeeze.
- A good interest coverage ratio of 16
Some more reasons to be bearish:
- A huge amount of debt
- Year over year projected growth rate of -80% for 2012.
- Investors have very little faith in the company after McClendon's antics.
- A very weak current and quick ratio of 0.59 and 0.45 respectively
- By closing its natural-gas hedges last year, it has become even more susceptible to the large drop in the price of natural gas.
- The biggest obstacle in its way at the moment is its ability to meet its obligations. If it is unable to raise the billions necessary, then it could be in a real trouble. Some analysts project that it might have to raise as much as $10 billion this year.
We have come up with two strategies that cater to both the bulls and the bears. More importantly it allows an investor to leverage his or her position for almost free, regardless of whether they are bulls or bears.
Strategy for the bulls Part I
This strategy should only be put into play if you are bullish on the stock.
It is still in a downtrend and could potentially retest the 13.50-14.50 ranges. If it trades down to these ranges, the Jan 2014 15 options should move up 1.50 or higher. We will assume that we can sell the Jan 2014 15 puts for $5.70. For each contract sold $570 dollars will be deposited into your account.
Strategy for the bulls Part II
The Jan 14, 22 calls are currently trading in the 3.45-3.75 ranges. If the stock trades down to the 13.50-13.40 ranges, the options should shed at least 75 cents. For this example, we will assume that we can purchase these calls for 3.00 or better. After the purchase of the call, you will still have a credit of $270 per put sold. For those who do not want to wait the above strategy implemented immediately.
If the stock trades below 15.00 the shares could be assigned to your account. Your final price will be 12.30 (15.00 minus 2.70). As you will be holding onto a long term option that expires only in Jan 2014, you would still have the potential to benefit handsomely from this trade, if the stock takes off.
Strategy for the bears Part I
This strategy should only be employed if you are bearish on the stock as there is a chance that you could triggered into shorting the stock, if the stock trades above the strike price of the calls you sold.
Sell the Jan14, 20 calls for $4.20 or better. For this, example we will assume that you are able to sell the calls for $4.20. For each contract sold you will receive $420.
Strategy for the bears Part II
We will use the funds from the Part I, to purchase the Jan 14, 13 Puts which are currently trading in the 3.35-3.45 ranges. We will assume that each put is purchased for $3.40, which will leave a credit of $80 per transaction.
If the stock trades above the strike price of the calls you sold, you could be triggered into shorting the stock. If you are triggered into a short, you would be shorting the stock at 20.80 (20.00 plus 0.80). If the stock should tank, you will be handsomely rewarded via the long term puts you purchased.
Company: Chesapeake Energy
Basic Key ratios
- Relative Strength 52 weeks = 19
- Cash Flow 5-year Average = 6.24
- Net Income ($mil) 12/2011 = 1742
- Net Income ($mil) 12/2010 = 1774
- Net Income ($mil) 12/2009 = -5830
- Net Income Reported Quarterly ($mil) = -28
- EBITDA ($mil) 12/2011 = 4847
- EBITDA ($mil) 12/2010 = 4595
- EBITDA ($mil) 12/2009 = -7481
- Cash Flow ($/share) 12/2011 = 6.11
- Cash Flow ($/share) 12/2010 = 5.68
- Cash Flow ($/share) 12/2009 = 5.07
- Sales ($mil) 12/2011 = 11635
- Sales ($mil) 12/2010 = 9366
- Sales ($mil) 12/2009 = 7702
- Annual EPS before NRI 12/2007 = 3.23
- Annual EPS before NRI 12/2008 = 3.56
- Annual EPS before NRI 12/2009 = 2.55
- Annual EPS before NRI 12/2010 = 2.95
- Annual EPS before NRI 12/2011 = 2.8
- Dividend Yield = 1.9
- Dividend Yield 5 Year Average = 1.14
- Dividend 5 year Growth = 5.12
- Payout Ratio = 0.11
- Payout Ratio 5 Year Average = 0.1
- Next 3-5 Year Estimate EPS Growth rate = 8.44
- 5 Year History EPS Growth = -5.28
- ROE 5 Year Average = 16.06
- Return on Investment = 6.2
- Current Ratio = 0.59
- Current Ratio 5 Year Average = 0.75
- Quick Ratio = 0.45
- Cash Ratio = 0.1
- Interest Coverage = 16
For investors looking for other ideas detailed data has been provided on one additional company. Our latest article could also prove to be a source of some new Caterpillar: A Yield Boost Of 12% Or A Lower Entry cost .
Company: Bristol-Myers (BMY)
Levered Free Cash Flow = 5.16 billion
- Number of Institutional Sellers 12 Weeks = 8
- Relative Strength 52 weeks = 86
- Cash Flow 5-year Average = 2.19
- Profit Margin = 17.8%
- Operating Margin = 33.9%
- Quarterly Revenue Growth = 4.8%
- Quarterly Earnings Growth = 11.7%
- Operating Cash Flow = 4.75B
- Beta = 0.23
- Percentage Held by Institutions = 68%
- Short Percentage of Float = 1.8%
- Net Income ($mil) 12/2011 = 3709
- Net Income ($mil) 12/2010 = 3102
- Net Income ($mil) 12/2009 = 10612
- Net Income Reported Quarterly ($mil) = 1101
- EBITDA ($mil) 12/2011 = 7782
- EBITDA ($mil) 12/2010 = 6815
- EBITDA ($mil) 12/2009 = 6309
- Cash Flow ($/share) 12/2011 = 2.79
- Cash Flow ($/share) 12/2010 = 2.61
- Cash Flow ($/share) 12/2009 = 2.21
- Sales ($mil) 12/2011 = 21244
- Sales ($mil) 12/2010 = 19484
- Sales ($mil) 12/2009 = 18808
- Annual EPS before NRI 12/2007 = 1.38
- Annual EPS before NRI 12/2008 = 1.74
- Annual EPS before NRI 12/2009 = 1.85
- Annual EPS before NRI 12/2010 = 2.16
- Annual EPS before NRI 12/2011 = 2.28
- Dividend Yield = 4.00
- Dividend Yield 5 Year Average = 5.00%
- Dividend 5 year Growth = 3.44%
- Payout Ratio = 0.58
- Payout Ratio 5 Year Average = 0.69
- Next 3-5 Year Estimate EPS Growth rate = 3
- 5 Year History EPS Growth = 13.58
- ROE 5 Year Average = 26.3%
- Current Ratio = 1.63
- Current Ratio 5 Year Average = 1.9
- Quick Ratio = 1.79
- Cash Ratio = 1.31
- Interest Coverage Quarterly = 47.40
The suggested strategies provide investors with a means to leverage their positions for almost free and the left-over money from the sale of the puts or the calls can be used to lower one's entry price (long or short entry price). However, the suggested strategies should only be employed if you are bullish or bearish on the stock. If you fall under the neutral camp, you would be better off looking for alternative plays. Note that those that decide to implement the bearish strategy could be pushed into shorting the stock if it trades above the strike price the calls were sold at.
This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware
Additional disclosure: EPS and Price Vs industry charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Option tables sourced from Yahoofinance.com