Among the biggest winners in Wednesday's early trading are
Chesapeake Energy (
CHK
)
and
Facebook (
FB
).
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Chesapeake's underwhelming spike
By the time it became fully apparent that natural gas giant
Chesapeake Energy
needed to sell off assets to stave off of a looming liquidity
crunch, the damage had already been done.Shares had fallen from the
low $30s in the spring of 2011 to below $15 in the spring of
2012.
For many, that was a sharp overreaction, and some have
anticipated a major rebound for the stock once efforts to shore up
thebalance sheet got underway. After all, Chesapeake had
amassed some of the industry's most valuable shale gas acreage,
which on a sum-of-the-parts basis was likely still worth at least
$25 or $30 a share, according to some analysts.
Well, with majorasset sales taking place this week, shares have
received only a modest boost, rising around 2% this morning to
around $20. Chesapeake has agreed to sell various assets for almost
$7 billion, which should alleviate any lingering balance sheet
concerns. Of course, with fewer assets, analysts are now tasked
with figuring out a value for the remaining assets. The tepid
investor reaction may be grounds to assume that a figure in the
$20s -- and not the $30s -- is what you should be thinking
about.
Of course, much of this stock's value is tied to gas prices,
which began falling sharply in 2010 and are only now starting to
rebound.
Chesapeake, even as it has sought to increase its exposure to
oil and reduce its dependence on natural gas, is still seen as
primarily a gas producer. So any major rebound in this stock may
need to wait for firming gas prices. It's worth noting that
gasfutures contracts indicate thecommodity could rebound to $4 per
thousand cubic feet (
MCF
) by February 2014, though you have to go out to the October 2019
contracts to see a projected move to $5.
Facebook on the mend
Just a few weeks ago, I asked whether
Facebook
would ever find a floor
.
As I noted then, "In the face of more supply of stock coming our
way, few were interested in stepping in. That supply/demand
backdrop for shares has now overtaken any discussion of
valuations." Well,CEO Mark Zuckerberg wants to change the
subject. After an extended period of staying off the radar, he
appears to be putting on a charm offensive, issuing a mea culpa for
the company's missteps on Tuesday evening, and vowing to do better.
That's giving the stock a 6% gain today, one of its strongest
one-day advances yet.
If Zuckerberg really wants to help support this stock, which
still trades for less than half of its high, then he needs to go
beyond the financial press with his comments and go straight to
thehedge fund community. In the second quarter, a number of
high-profile hedge fund managers bought major stakes in Facebook
when it traded in the upper $20s. (
See this article as an example
.)
Many of those same fund managers found themselves sitting on
instant losses as the stock kept falling. Presumably, some of have
thrown in the towel and we may see that significant sales took
place in the third quarter when13-F filings are released in
mid-November. Then again, they may be looking to "average down "
their losing positions with shares closer to $20 than $30.
Since few of us really know how successful Facebook will be in
delivering the very strong profits that analysts hope to see down
the road, we can only assess this stock's current value on that
ephemeral notion known as "sentiment." Will Zuckerberg's charm
offensive reverse the recent weak sentiment? Time will tell, but
today's share price reaction is a positive sign.
Action to Take -->
There are a lot of remaining questions about Facebook's
revenue growth prospects andprofit margin profile, so it's still
wise to watch this stock form the sidelines, at least until it is
apparent that the company can start meeting or exceeding the growth
metrics that analysts have laid out for the company.
Chesapeake's opportunity is a bit more intriguing. With the
balance sheet challenges receding, shares have likely found a floor
here around $20. And this is still one of the best ways to play the
shale gas boom. Gas prices have begun to firm again, and those
futures contracts noted above continue to strengthen. Considerable
patience may be required as nobody is talking about $4 natural gas
just yet, but the export opportunity, coupled with the ongoing
coal-to-gas (2G) power plant transition could keep this commodity
-- and Chesapeake's stock -- moving higher.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.