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!
My definition of "Stock Madness" would be to put your money into a $239 billion megabank just at the end of one of the biggest easy-lending bull runs of the past 50 years. The troubles in the subprime market could just be the tip of an iceberg. If a mass of lenders inflated incomes and home values to get those with low credit scores into homes they couldn't afford, what makes you think lenders wouldn't do the same for those further up the credit food chain?
Want a better alternative than watching a $239 billion behemoth grind out single-digit growth? Allow me to introduce natural-gas producer Chesapeake Energy
Some further advantages for Chesapeake:
- Natural-gas prices are comparatively inelastic -- unlike oil, there are no easy ways to import significant quantities quickly.
- Gas futures for the next five years trade on the NYMEX between $6.90 and $9.20 per million cubic feet equivalent -- a range that would make the company extremely profitable.
- The company lowers operational costs and ensures supply by owning or leasing more than half of its 135 drilling rigs.
- A key competitive advantage is the geographical concentration of its wells, which lowers marginal distribution and operational costs.
- The company has a huge expertise in unconventional (high-tech) gas drilling, which is a significant advantage, since new exploration is mostly unconventional.
- CEO Aubrey McClendon has purchased 5.7 million shares on the open market at a cost of $165 million in the past 18 months, and he now owns nearly 27 million shares.
New North American reserves are having a tough time keeping up with the gradual increase in demand. The oil majors' gas production is in secular decline, and Chesapeake stands to benefit from long-run gas-price increases.
By my estimation, Chesapeake shares are trading at around 60 cents on the dollar, with a huge potential to the upside. Of course, you could stick your cash in lumbering old Citigroup
Does this stock deserve to move on to the next round? If you think so, simply head to Motley Fool CAPS and rank the stock "outperform." If not, vote it "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.
Click Citigroup to read the opposing article in this contest.
Click here to read all of the entries in the tournament.
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Chesapeake Energy is a Motley Fool Inside Value selection.