This Commodity Trend Points to Strong Returns for a Merger Play

The winter months in North America typically bode well for investors in natural gas. However, the specific dates and moves in prices depend significantly on weather conditions. That can make getting the exact timing challenging.

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  • However, investors could instead look to invest in undervalued stocks that could rise higher even past a cyclical trend and rally for years to come. That would play well to America’s natural gas resources and our rising ability to export it to higher-priced markets.

    One up-and-coming play is Chesapeake Energy (CHK). The producer of natural gas properties is combining with Southwestern Energy (SWN) in a deal that will put the combined company on par with the major players.

    While earnings and revenues are down over the past year as energy prices have declined, Chesapeake trades at just 2 times earnings.

    Plus, Chesapeake sports a 68 percent profit margin. Even paying for Southwestern will still lead to an inexpensive play in the energy space.

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  • Action to take: Investors may like shares here before the merger is complete. At current prices, Chesapeake also pays a 4.7 percent dividend.

    For traders, the June $85 calls, last trading for about $2.75, could pop higher in the coming weeks from any spike in natural gas prices. Traders should look to take quick profits there. After the merger, there  will likely be other call option opportunities in the combined entity.


    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.

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