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Lately Chesapeake Energy Corp. (NYSE: CHK) stock has been getting some unwanted attention from short sellers. A lot of traders see CHK stock price weakness, and they want to profit from an anticipated fall.
CHK's short float sits at 22.5%. That means of outstanding shares of CHK stock floated - those that are freely bought and sold without restriction -nearly one-quarter have bearish bets taken out on them. That compares to the S&P 500, which has an average short float of 3.7%.
So, why is CHK stock so heavily shorted?
"Its combined market cap and high daily liquidity make it a short player's dream," Money Morning Global Energy Strategist Dr. Kent Moors said. Chesapeake has a market cap of $11 billion, and it trades 21 million shares on average daily.
No doubt, the short sellers have pummeled CHK stock. Traders saw a collapse in natural gas prices and began laying the short bets on CHK - the country's second-largest natural gas producer after Exxon Mobil Corp. (NYSE: XOM).
Natural gas prices topped out at $6.149 per million British thermal units (BTU) in February 2014. By last month, they had fallen $2.511 per million BTU - a nearly 60% decline.
From June 2014 to March 2015, CHK stock fell 54% from $29.07 to $13.42.
Chesapeake has since recouped a little bit of those losses. As of Friday, CHK stock was trading at $16.54.
Now investors are asking, "Should I buy CHK stock?"
One reason some will is they anticipate a short squeeze play - where a rise in the stock price forces short sellers to buy to cover their short position, adding a bigger pop to the end of any rally. Right now the short float remains elevated. But natural gas prices have regained slightly, meaning the March lows could signal a bottom. And CHK stock is trading at a very low 10.7 price-to-earnings ratio.
Another reason some will buy CHK stock is the company's takeover target potential. In this favorable M&A environment - which tends to take hold in the energy sector in an environment of low energy prices - Chesapeake could get swallowed up in a consolidation of the industry.
But here's what to consider before buying this natural gas giant...