In the competitive spirit of college basketball's annual championship tournament, The Motley Fool brings you Stock Madness 2007! Our writers are making head-to-head arguments for their chosen stocks (but not necessarily investment recommendations -- this is, after all, a game), and you'll pick the winners with your article recommendations and Motley Fool CAPS ratings. Who will win the right to cut down the net? Let's tip things off and find out!
So let's get the smoking thing off my chest (and I haven't smoked a cigarette in 40 years): The American Heart Association lists a litany of life-threatening and other debilitating diseases, and according to the Centers for Disease Control, the total economic costs caused by smoking average $10.27 per pack sold, more than twice the average pack's selling price of $4.47. Former Marlboro Men, two of whom have died from lung cancer, have come out against the cigarette industry, even going so far as to testify against it in Congress.
OK, so maybe I didn't convince you on the anti-smoking argument, yet I still think that it's Stock Madness to consider purchasing Altria (NYSE: MO ) shares. Why would you buy Altria now after a tremendous run-up in the stock price that put the company at fair value at best? Let me give you a much better place for your money: natural-gas producer Chesapeake Energy (NYSE: CHK ) , which is as much as 40% undervalued by my estimates, and has a heck of a lot more mojo than big MO. Here's why I like Chesapeake.
- Despite a huge increase in drilling activity, U.S. natural-gas production has been in decline over the past five years. Gas production from the oil majors is in decline, while innovative companies like Chesapeake take their place.
- Don't let one relatively warm winter fool you -- long-run natural-gas demand increases each year. The current political push for new ethanol plants over the next two years is estimated to permanently increase natural-gas demand by an extra 1%.
- There are no easy substitutes for North American gas. It takes years to get approval for and build liquefied natural gas plants, and by that time, foreign producers may have easier markets in China and India. New nuclear and coal plants are also a long way off.
- New gas wells require unconventional drilling techniques to extract natural gas, and Chesapeake is at the top of the tree when it comes to the required expertise.
- Chesapeake is rapidly ramping up production and at the same time improving its proven and probable reserves. Proven reserves increased by 19% last year and are set to grow a further 35% over the next two to three years, without factoring in any possible acquisitions. Current proved reserves would last 15 years, at least 50% above the industry average.
- Management's astute $12 billion land grab over the past few years has left the company with 10.7 million net acres, or enough drilling prospects for the next 10 years at today's enhanced drilling rate.
- Chesapeake has the best hedging program in the industry. In 2006, this resulted in average hedged prices for its gas that were more than 34% above the unhedged price. Last year was an exceptional one, but hedges already in place for 2007 should result in a 15% premium to the unhedged price.
CEO Aubrey McLendon has vision and a long history in the industry and owns 6% of the company. Over the past year or so, he has bought $165 million of shares in the open market at prices up to $32 per share -- and, remember, this guy knows the industry and already had a boatload of shares.
I say forget riding with the Marlboro Man and get onboard Chesapeake's pipeline to better profits.
Does this stock deserve to move on to the next round? If you think so, simply head to Motley Fool CAPS and pick the stock to outperform. If not, vote it an "underperform." Later this week, we'll tally your votes -- and your article recommendations -- to determine which stocks will advance one step closer to the title.
Read our opposing article on Altria, or see all of the other entries in this tournament.
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Philip Durell, the advisor/senior investment analyst for Inside Value, owns shares in Chesapeake Energy, which is anInside Valuerecommendation. The Motley Fool has a disclosure policy.