Sometimes it's best to wait for the dust to settle.
After the earthquake in Japan last March triggered a deep sell-off
in all stocks related to nuclear power, a number of investors
started to bottom-fish. Any buying turned out to be premature, as
key industry stocks fell ever lower to levels not seen in several
That bottoming process appears to have ended, and with many
far from their 52-week highs, these beaten-down names could
material upside in 2012.
Global X Uranium ETF (NYSE:
, launched in November 2010, gives a clear snapshot of how uranium
stocks have fared.
Why has the ETF made a 25% upward move in just a few weeks? Mostly
due to the fact that the
for uranium has stopped falling. It was in the mid $60s (per pound)
a year ago, fell to about $50 this past fall, and in recent
sessions, has moved back up into the low $50s. (As a point of
reference, uranium sold for $135 a pound back in 2007.)
Emerging economies: still hungry for nuclear
To be sure, the Japanese nuclear crisis has surely led to a pause
for this energy source. Major economies like Japan and Germany
intend to wean themselves from nuclear power, while other economies
like the United States and France have delayed plans to build new
reactors. Yet demand for nuclear power -- and for uranium by
extension -- remains unabated in some of the world's
fastest-growing economies such as China, which is the most
aggressive builder of new power plants.
It's not just China, either. Let's look at India as an example.
Electricity generation in that country has tripled since 1990, but
that's not enough to meet booming demand in this densely populated
country. Moreover, oil imports are leading to chronic trade
imbalances, a trend that will only worsen as oil prices rise. So
India's leaders have committed to giving nuclear energy 25% of the
nation's power generating capacity, up from 2.5% today.
To get there, India's uranium appetite is forecast to spike tenfold
over the next decade. As it stands, operators are already having
trouble finding enough fuel to keep plants running. In fact, only
six of the country's 17 reactors are operating anywhere near full
Supply and demand
There are a couple of other factors to consider that could boost
uranium prices. On the demand side, crude oil appears to be staying
north of $100 a barrel (a price which Saudi Arabia has noted it now
needs to meet ever-higher domestic spending needs.) Some think oil
could go to $110, $120 or even higher once the U.S. and Europe
rejoin the league of growing economies. Pricey oil has always
renewed fresh talk of the need for nuclear power, which entails
high upfront construction costs, but low eventual operating costs.
On the supply side, a key agreement with Russia to provide
de-militarized uranium is set to expire in 2013. That means uranium
miners will need to step up their output simply to meet existing
demand. And demand is sure to grow. However, a number of
long-standing uranium mines are starting to see declining levels of
output, which should help to undergird prices as the supply/demand
Consider these numbers... There are currently 430 nuclear-power
plants in operation worldwide. An additional 60 plants are under
construction worldwide (roughly twice as many as will be
decommissioned in the next five years). Moreover, there are 300
additional plants that are currently being contemplated for
construction, according to the International Energy Agency (IEA).
Three ways to play
from the resurgence in uranium in three ways. First, you can invest
in some of the smaller uranium producers that carry a high degree
of risk if uranium prices ever fell to fresh lows, but have a high
if uranium prices indeed firm up. Check out mining companies such
Uranium Energy Corp (AMEX:
Uranerz Energy (AMEX:
Uranium Resources (Nasdaq:
Other names to consider include
, a domestic processor of uranium, and
which provides training for the next generation of nuclear
Second, you could invest in a broad-based fund such as the Global X
Uranium ETF or the
Market Vectors Uranium & Nuclear Energy ETF (NYSE:
. These funds strike a nice balance of exposure between uranium
miners and the utilities that use uranium.
Yet in many respects,
, the industry's largest uranium miner, holds the greatest appeal.
The company has a decade-long supply agreement with China to supply
more than 20 million pounds. That long-term contract should lead to
fairly smooth revenue streams.
Shares look reasonably priced at around 16 times projected 2012
earnings per share (
of $1.30. But that's not the way to look at this stock. Instead,
shares of Cameco move in lock-step with uranium prices, and the
fact that shares are 50% off the
tells you where sentiment stands right now.
Cameco will report annual results on Feb. 9, which will provide a
solid glimpse into the company's production roadmap and its latest
view of industry supply, demand and pricing. Though shares could
easily mark time in the near-term if uranium prices don't rebound
further, this is a great long-term play on an industry that will
move from over-supply to under-supply.
Risks to Consider:
If oil prices pull back sharply, then the case for nuclear
power will weaken. Moreover, a glut of natural gas and the
resulting price drop has some utilities considering a move to build
more gas-fired plants at the expense of other energy sources.
Action to Take -->
We're approaching the one-year anniversary of the earthquake in
Japan, which seemingly set the nuclear power industry back a decade
or two. In reality, the setback should prove to be much more
short-lived. Investors are just starting to warm up to uranium
stocks again, though they remain far from their peaks. As uranium
prices slowly rebound, especially as we get closer to the eventual
drop-off in Russian supply next year, then stock prices for the
companies and funds noted above should move up in tandem.
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David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.