Is Chesapeake Energy Due to Drop?

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Chesapeake Energy (NYSE: CHK  ) sank 1% in early Friday trading after Stifel downgraded the natural gas and oil producer from buy to hold.

So what: Along with the downgrade, analyst Amir Arif removed his price target on the stock of $26 -- about where it sits now -- suggesting he sees limited upside and possibly even significant downside. The stock has rallied nicely this year on strong efficiency improvements, but Arif thinks that it leaves current investors vulnerable for a pullback given Chesapeake's limited production growth prospects for 2014.

Now what: Stifel doesn't expect Chesapeake's continued cost improvements to wow Wall Street for much longer. "We believe that investors will begin to shift their investment focus from P/NAV discounts to EBITDA multiples and growth outlook for CHK and as that shift happens, this name looks fairly valued on an absolute basis and will relatively underperform its peers," noted Stifel. With Chesapeake shares up about 60% in 2013 and trading at an industry-matching EV/EBITDA multiple 6, I'd agree with Stifel that the current risk/reward trade-off looks unappealing. 

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