Bargain hunting for stocks in the nuclear industry
Troubles in Japan aren’t the end of the nuclear industry, says a U.S. advisory whose discount buys include two Canadian uranium stocks.
We’re taking one more look at the nuclear industry.
A month and a half after the shocks that struck the Fukushima Dai-Ichi plant in Japan, officials are still fearful of a leak.
And many others are fearful that the once-bright future of nuclear plants around the world has grown dim.
Not so, says one prominent American advisory. There are too many trends converging in favour of nuclear power, says Personal Finance.
That also means that there are bargains out there for investors among stocks that have been battered by the pessimism of the past six weeks.
It has three buys for investors. One is a U.S. group that constructs nuclear plants. The other two are Canadian uranium producers.
We have dealt with this issue twice in recent weeks. One analyst was also optimistic about the future of nuclear power (see Daily Buy-Sell Adviser, April 13). Another took a somewhat less optimistic view (see Daily Buy-Sell Adviser, April 15).
In this article, the editor of the advisory, Mr. Elliott H. Gue, and his co-author, Mr. Peter Staas essentially they come to a simple conclusion. The nuclear industry is filling a void that no one else is able to fill.
A political agenda
Following the March 11 earthquake and tsunami and the subsequent fears of meltdown at the Fukushima plant, Germany for one reacted dramatically. It shuttered seven of its 17 nuclear plants for safety checks.
That is part of a plan to get the country off nuclear power. There are others — “often those with a political agenda,” say the authors — who are confidently predicting the end of the global nuclear renaissance.
Investors were certainly anxious. While equities related to the industry have recovered some part of their losses, the WNA Nuclear Energy Index lost almost 10 per cent in March.
Yet the authors pose this question. If not nuclear energy, then what?
No other options
Nuclear energy accounted for 13 per cent of the world’s electricity in 2008, according to the most recent data available from the International Energy Association.
“But naysayers don’t address what would replace nuclear energy’s contribution to the global electricity mix,” say the authors. Alternative energy sources, like wind or sun, are still intermittent.
“At the same time, global electricity demand continues to climb, fueled by the proliferation of electronic devices and rapid development in emerging markets like China and India.”
Both of these nations declared they would reassess their ambitious nuclear programs in light of events in Japan. Yet they are unlikely to change their plans, observe these writers. With rapidly accelerating demand for electricity, there are really no other options open.
As more governments join in the crusade to reduce carbon dioxide (CO2) emissions, the case for nuclear power grows. “Despite concerns about the disposal of radioactive waste, atomic power is one of the few sources of consistent base-load power that can be ramped up significantly and doesn’t emit CO2.”
A new cooling system
There’s one more pertinent fact. The safety problems at Fukushima won’t unravel China’s plan for 100 new reactors by 2030. The winning design in China’s new nuclear power program includes safety features that would have limited the damage at Fukushima Dai-Ichi, note these authors.
And remember, that was an earthquake and tsunami of historic proportions. The reactors shut down as they were supposed to, but the failure of the electric grid and back-up generators crippled the plant’s cooling power and led to a partial meltdown.
The new design for China, the Westinghouse AP1000 reactor, has a cooling system that can continue to function even without electricity. “The disaster would seem to militate against exclusively running reactors that are 40 years old,” observe the authors.
800-pound gorilla
If nuclear power still has a strong future, as this advisory believes, then investors have a buying opportunity. And it starts with the “800-pound gorilla of the uranium market,” Cameco Corp. (NYSE-CCO; NYSE-CCJ).
This is not a new recommendation for the advisory. It has been in its Growth Portfolio for two years. So it likes the company’s profile whether or not it sits at bargain prices.
Cameco plans to double its annual output by 2018, report the authors. It will step up production at all of its mines, including its long-delayed Cigar Lake project. “Take advantage of the post-Fukushima correction and buy Cameco under US$42,” is their advice.
As high as $44 in February, Cameco has been hovering in the upper $20s for a few weeks. It trades at $27.86 today, yielding 1.5 per cent on its dividend of $0.40.
Uranium One (TSX-UUU) is the other Canadian miner this advisory likes. It does its mining in Kazakhstan, the single largest uranium producing country in the world.
Late in 2010, it also closed a deal with Russia’s JSC Atomredmetzoloto in which it handed the Russian firm a controlling interest in Uranium One in exchange for contributions to its Kazak mines and US$610 million in cash.
This gives Uranium One the means to double its production over the next five years. The stock, which was under $2 last spring, soared up to over $7 before getting kicked back by events in Japan.
A buy under C$7.50, it trades at $3.91 with no dividend.
The U.S. stock is Shaw Group (NYSE-SHAW). Shaw has a 20 per cent stake in Westinghouse, the gorilla in the nuclear power construction industry and the maker of the previously mentioned AP1000 reactor.
Shaw also performs over 40 per cent of the maintenance and upgrades at U.S. nuclear power plants. And its biggest source of revenue remains conventional coal and gas-fired power plants.
Buy it up to $39, says the advisory. From a low of $27 just after the disaster, this stock has risen to $38.52, with no dividend.
The demise of the nuclear industry is greatly exaggerated, say these authors. If that is true, several Canadian stocks are greatly undervalued.
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