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Sell Sirius XM Ahead of Earnings, Buy Chesapeake Energy

Since the July 1, the stock has climbed as high as 20%, reaching $2.20 on two separate occasions. It is clear that the stock has already rallied on this news and that the only possible direction it can go upon the announcement is down, creating a "sell-the-news" type of a situation. With no clear catalyst remaining, I would not want to be a holder of Sirius, particularly while its status in relation to Liberty Media (LMCA) remains so uncertain.

Buy Chesapeake

These days, it is often considered offensive to say anything positive about Chesapeake Energy (CHK - Get Report). The stock has suffered a considerable amount of punishment over the past several quarters due to some regrettable decisions by management and significant gaps without positive news.

Its self-inflicted wounds notwithstanding, there are also issues of concern for the entire energy industry that are hurting rivals such as Console Energy (CNX), EOG Resources (EOG) and Range Resources (RRC). The majority of the concerns center on the health of the overall sector and, in particular, of natural gas, which has had some challenges this year due to reduced shale demand.

Chesapeake will report earnings for the second quarter on Tuesday before market open. Analysts are expecting EPS of 7 cents, down from the 12 cents they once expected. The company is expected to announce revenue of $2.37 billion, lower than the $3.32 billion that it reported in the same period of year ago.

For the fiscal year, analysts are now expecting EPS of 38 cents on revenue of $8.29 billion. I like Chesapeake at this level because not only has the stock been beaten up for most of the year, but not a whole lot is expected. Although it can still disappoint, I tend to think that there is a greater chance that the surprise will be on the upside.

The company has produced double-digit revenue growth over the past four consecutive quarters. What's more, its year-over-year growth has been by an average of more than 50%, including 65% in Q2 of fiscal 2011. Even more remarkable is that, in terms of profitability, Chesapeake offers both higher profits and operating margins than most of its peers with much higher multiples.

As it stands, the stock is down almost 50% from its 52-week high of $35.75. It is unlikely that its fundamentals have changed that drastically to justify this level of punishment. I would be adding shares at these levels in anticipation of a solid report.

At the time of publication, the author held no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.
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