Over the past few weeks, investors have watched a collection of bankruptcy-bound stocks rise to unthinkable levels. Rental Car provider Hertz (NYSE:HTZ) is one such company whose share price actually appreciated after the firm filed for bankruptcy. Chesapeake Energy’s (NYSE:CHK) stock is another example of this so-called “bankruptcy bubble.”
The energy stock saw its share price rise 64% on Monday, only to fall another 62% on Tuesday morning. The stock continued to decline through the second half of the week in what can only be described as an inexplicable roller coaster.
So what’s going on with CHK stock? Is it worth a buy now that it’s trading back below $16 per share? The answer is no. Here’s why.
CHK Stock Riddled With Risk
Chesapeake announced earlier this year that it was contemplating filing Chapter 11. On Monday afternoon, that appeared to be nearing fruition as rumors that the firm was planning to file for bankruptcy as its June 15 interest payment came due.
On Tuesday, CHK stock became even more volatile when the trading was halted for Chesapeake in advance of “news.” Most were expecting to hear an update on the firm’s debt pile or an update on its bankruptcy plans, but in the end, no information was issued, causing a flurry of confusion among investors.
Neal Dingmann of SunTrust Robinson attributed the roller coaster to a flurry of investment activity among retail investors. He noted that many investors were also closing out short positions on CHK stock, which, together with the retail interest, ended up tripping algorithmic traders, which automatically began buying the stock.
“Frankly I have never seen a day like yesterday,” he wrote.
It’s unclear why CHK stock suddenly began to peak traders’ interest— part of the allure could be the momentum that has powered a rally among beleaguered stocks like Hertz (NYSE:HTZ) and JC Penney Company (OTC:JCPNQ). But the bottom line for all of them — including Chesapeake — is that they’re likely heading to zero once this bubble pops.
Energy Sector Uncertainty Persists
Chesapeake is in a particularly terrible situation because not only is the firm’s debt pile about to push it into bankruptcy, but the company is also operating in a sector that’s been devastated in recent weeks. Energy stocks, on the whole, are struggling as demand uncertainty coupled with drastic production cuts weigh on future visibility.
CHK stock is no exception. In fact, it’s in a worse spot than many of its peers because the firm’s highly leveraged operations were already under strain heading into this crisis.
There was a sudden rush toward energy stocks when oil prices were crumbling as investors looked for ways to find long-term value in the market’s panic. Despite some stabilization in prices and steps toward reducing the global glut, the fact remains that oil prices are still under pressure.
What’s more, while the reopening of economies around the world has been positive from a demand perspective, it doesn’t necessarily mean energy firms are in the clear. There are a great many aspects of the global economy that need to make a significant recovery before oil is on solid footing. One such industry is aviation, where jet fuel demand is under extreme pressure.
On top of that, there’s the worry that a second wave of the novel coronavirus could force some economies back into lockdown-mode. That’s already become a concern in America, where several states have seen the number of new coronavirus cases spike in the wake of reopening their economies.
The Bottom Line
There is no scenario in which Chesapeake stock is a buy. Even if it doesn’t file for bankruptcy, a scenario that looks increasingly unlikely, the firm’s debt obligations will weigh it down throughout the duration of this crisis.
If, as is most likely, CHK files for bankruptcy, the chances are that the stock will head to zero. The recent advance of bankruptcy stocks has been, for lack of a better word, bizarre. Chesapeake appears to be nearing the end of its life as an energy company, and investors shouldn’t go down with that sinking ship.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.