Frederic Poses, a member of the Board of Directors at Chesapeake Energy Corporation (NYSE:CHK), directly purchased a little over 150,000 shares of the stock on June 21st at an average price of $19.87 per share according to a Form 4 filed with the SEC. This purchase, which comes out to more than $3 million worth of the natural gas producer, increased Poses’s direct holdings to over 690,000 shares. Insider purchases are worth tracking in our view because insiders should be particularly confident in the company in order for buying more shares to make sense as opposed to diversifying their wealth. In fact, insider purchases do tend to narrowly beat the market. We had tracked another insider buying Chesapeake Energy Corporation (NYSE:CHK) earlier in June; stocks bought by a consensus of insiders are particularly likely to outperform the market. Read our analysis of studies on insider trading. The stock has risen slightly since this most recent purchase, to about $20.50 per share as of this writing.
Chesapeake Energy Corporation (NYSE:CHK)’s revenue grew considerably last quarter compared to the first quarter of 2012. While margins improved- the company had been unprofitable a year ago- expenses were still high enough that the 10-Q only reports 2 cents per share in earnings as natural gas prices remained low. However, with depreciation being a major expense, Chesapeake Energy Corporation (NYSE:CHK) did manage to generate over $900 million in cash from operations. Wall Street analysts are expecting conditions to improve for the company going forward, with the result being a forward P/E of only 10 and a five-year PEG ratio considerably lower than 1. While natural gas does have good long-term prospects, we might be a bit skeptical of the sell-side’s optimism here. A number of market players are negative on Chesapeake Energy Corporation (NYSE:CHK), with 12% of the float held short.
We maintain a quarterly database of 13F filings from hundreds of hedge funds. The primary use of this information is to help us develop investment strategies (for example, the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year) but we can also review interests of various funds in individual stocks. Billionaire activist investor Carl Icahn had taken a large stake in Chesapeake Energy Corporation (NYSE:CHK) last year after the stock plunged on management and liquidity concerns, and still owned over $1 billion worth of stock at the end of March (check out Icahn’s stock picks). Millennium Management, run by billionaire Israel Englander, increased its holdings of Chesapeake during Q1 to a total of 3.7 million shares (find Englander’s favorite stocks).
Other natural gas focused producers include SandRidge Energy Inc. (NYSE:SD) and Devon Energy Corp (NYSE:DVN), and we can also compare Chesapeake to Apache Corporation (NYSE:APA) and to Encana Corporation (USA) (NYSE:ECA). SandRidge Energy Inc. (NYSE:SD), as Chesapeake did last year, has been having problems related to its aggressive development plan in the low nat gas price environment. It is expected to lose money both this year and next year, and the stock is currently down 23% from this point in 2012. Encana Corporation (USA) (NYSE:ECA) has also been struggling, with revenue down over 40% in the first quarter of 2013 versus a year earlier. It does offer a high yield but we think that we would avoid it. The other two companies trade between 9 and 10 times forward earnings estimates, in line with Chesapeake and therefore also somewhat dependent on an improved natural gas market. Devon Energy Corp (NYSE:DVN) and Apache Corporation (NYSE:APA) each experienced lower revenues in their most recent quarter compared to the same period in the previous year, and while we wouldn’t rule out an improved performance from those companies we would prefer to see their financials improve before thinking about buying.
There’s a good deal of opportunity in Chesapeake Energy Corporation (NYSE:CHK) if natural gas prices improve- even if the company falls a bit short of analyst expectations, it could easily be undervalued at current prices. In that case the stock would likely be a better option than its peers as well. As a result, while we don’t like the business as it stands we’d be interested in following that market and future quarters from the company carefully, particularly with the consensus insider buying we’ve reported on here.
Disclosure: I own no shares of any stocks mentioned in this article.