They Love to Hate Chesapeake Energy Corporation (NYSE:CHK)

If you are looking for a stock that is being overlooked, whose growth rates are identifiable and are already being substantiated, but whose PE multiple is less than half of expected future growth rates, we have a good candidate.

Prior to 2017 Chesapeake Energy Corporation (NYSE:CHK) had one of the worst 2-year runs of any other stock currently on the market today.  The company almost went bankrupt, oil prices were declining and both revenue and earnings collapsed.  Asset valuations tanked as the value of proven reserves based on oil prices declined, and a tragedy happened as the president of the company met his death after being charged with manipulation.

Admittedly, the two years prior to 2017 could have hardly been worse, but somehow the company has managed to make it through all of that.

Unfortunately, the past lingers, and investors remember all too well what happened over those past couple of years.  They remember the risk of bankruptcy more than anything, and in many ways that memory has kept short Sellers extremely interested in this stock.  CHK has been at times one of the most shorted stocks on the market, but that's not based on current results or future expectations.

Currently, analysts estimate that Chesapeake Energy will earn 79¢ per share in calendar 2017.  At current prices that gives the stock a PE ratio of 5.6 times earnings.  79¢ per share is the average of all estimates, not the high-end.  The high-end is $1.20.

Looking ahead, in calendar 2018 the average estimate is 89¢ per share, making the forward looking PE ratio only 5 times earnings.

Broadening our observation, the stock has already earned 26¢ per share in calendar 2017, so it is turning the corner from the disasters in both 2016 and 2015.  The company is already turning the corner, but those memories of past problems linger.

The question really is how long will the past be a monkey on the back of this stock?

The company is already earning money and in a quite aggressive manner.  Wall Street already expects this pace to continue not only in 2017 but accelerate by 12% in 2018.  If earnings growth is expected to accelerate by 12% we would normally expect the PE ratio to reflect growth, but it doesn't.

Admittedly, the growth rate vs. prior years is astronomical in calendar 2017 given the disasters that had existed, so using current year over year growth rates to determine proper PE multiples is unfounded, but looking ahead to 2018 when comparing that to 2017 estimates, of which two quarters are already under the belt and better than expectations, a 12% earnings growth rate can be used to determine proper PE multiples.

With the current PE multiple at 5 times earnings looking ahead to next year and 5.6 times earnings for calendar 2017, a proper PE multiple for the stock would be much closer to 12 times earnings.

To put that into clearer perspective, the stock currently trades at about $4.50, with a PE multiple of 5.6 times 2017 earnings expectations.  If the stock trades at 12 times earnings for calendar 2017, which would match the expected growth rate in 2018, the stock would be trading at $9.48.  That's more than a double from current prices.

Currently, investors in the stock are looking at past problems instead of looking at the transition that has taken place, the earnings that exist already, earnings that are expected to continue in 2017, and grow further in 2018.  Investors are not looking ahead; they're looking behind, but once investors start to look ahead shares of CHK can start to move significantly higher and much closer to its fair value based on earnings growth expectations that are already being proven.