Why Chesapeake Energy Corporation Might Pull Back in 2014

Does this analyst make a good case or is it just more noise from Wall Street?

Jan 7, 2014 at 2:15PM

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

What: Shares of Chesapeake Energy Corporation (NYSE:CHK) traded sluggishly on Tuesday after Bank of America downgraded the natural gas and oil company from buy to neutral.

So what: Along with the downgrade, analyst Doug Leggate lowered his price target to $31 (from $36), representing about 18% worth of upside to yesterday's close. While momentum traders might be attracted to the stock's strong return in 2013, Leggate believes that much of Chesapeake's improvement potential is already being discounted by Mr. Market.

Now what: According to B of A, Chesapeake's risk/reward trade-off isn't as attractive as it was last year. "At the root of this change is that the recovery thesis which initially attracted us to CHK's distressed valuation has largely played out," noted B of A. "While we expect CHK to accelerate efforts to improve efficiency across the board, including steps to increase free cash flow, much of this has arguably been recognized in a share price that appreciated 63% in the past year." With Chesapeake shares still trading at a forward P/E of only 11, however, Fools shouldn't be so quick to dismiss the upside potential.  

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Fool contributor Brian Pacampara has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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