News Analysis date published New: 
Wednesday, September 12, 2012 - 09:00
New Date created: 
Wednesday, September 12, 2012 - 09:28
New Date last updated: 
Wednesday, September 12, 2012 - 09:00

Buy or Sell? Wednesday's Winners: CHK, FB

Wednesday, September 12, 2012 - 9:00am

Among the biggest winners in Wednesday's early trading are Chesapeake Energy (NYSE: CHK) and Facebook (NYSE: FB).

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 the balance 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 major asset 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 gas futures contracts indicate the commodity 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 the hedge 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 when 13-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 and profit 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 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.

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