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Investing In The Nuclear Renaissance

Nuclear Plant

Since the election in November energy stocks have soared, with most of the attention being on conventional oil and gas producers. That makes sense, but traders and investors should not ignore the renaissance currently underway in another energy industry, nuclear power.

The conventional wisdom about the energy sector under a Trump Presidency is well known, and perfectly logical. Fossil fuels are back. Some of the campaign rhetoric that led to that belief, of course, is just that, words with no practical impact. There is a limit to what a President can do and bringing back coal jobs, a feat that would require changing global attitudes and economic realities, is beyond those limits. Some stated energy policies, however, are more achievable. The White House controls the Department of Energy and the EPA, so changing the regulatory environment to favor fossil fuels is fairly easily done. When Rick Perry was confirmed as Energy Secretary it looked to many people as just further confirmation that oil was the place to be.

On the surface that makes sense; Perry was the Governor of Texas, after all, which is rightly seen as an oil State. Dig a bit deeper into his record, however, and it becomes clear that Perry’s energy policy for Texas was more a matter of “all of the above”. He certainly created a favorable environment for oil and gas, but under his watch, Texas also became a leader in solar and wind power generation, indicating a practical approach above all else.

So, with Perry having no particular allegiance other than to cheap, efficient energy production, what does the President himself feel? Anybody attempting to analyze the economic effects of White House policy has already learned to treat words with care, but this week we saw a draft budget, something as close to a hard policy proposal when it comes to energy as there has been so far, and the message of that is clear. Even as cuts are applied to non-military programs pretty much across the board, nuclear power programs are emerging as winners. Looking back, that should come as no surprise. Trump’s take on the reaction to the Fukushima disaster was that - when cars or planes crash we don’t stop using them, we learn from what happened and build better, safer cars and planes. It seems then, as if nuclear power has a bright future under this administration.

As always, though, the question that traders and investors are faced with is, if nuclear power is looking at resurgence, what is the best way to play that prospect? The obvious first place to look is at a company that builds reactors and their components, such as BWX Technologies (BWXT). The problem there, though, is twofold. First, approving any new reactor building takes a very long time and those currently proposed or under construction are fully priced in to BWXT. That is even more the case because of the second reason, the stock has gained over a third since the election. In short, the value in BWXT has long gone.

The other logical way to play nuclear power, however, offers a better opportunity. Nuclear reactors need fuel, and that means uranium. After Fukushima, the uranium market had its own meltdown as several countries, including Japan, vowed to move away from nuclear power. Even those that didn’t announce such a policy such as the U.S. were confronted with a public that had lost trust in nuclear power as a safe, clean energy source.

(Click to enlarge)

Public memory is short though, and the return to favor of the nuclear industry has seen uranium recover somewhat, although it is still priced about 40 percent lower than before the accident in Japan. That upward trend in pricing and the prospect of a more favorable regulatory environment for the industry can combine to be a huge benefit to uranium miners such as Cameco Corp. (CCJ).

(Click to enlarge)

As you can see, CCJ also gained significantly following the election, but the retracement since the beginning of the year makes the stock more attractive. It can benefit directly from comments or policies that favor nuclear power in the U.S. or elsewhere, but can also be pushed higher by the long-term recovery in uranium pricing.

Those things combined make CCJ my preferred way of playing the nuclear power business, but if you have another that you prefer, have at it! What is important though is that investors, particularly those with an energy focus, have exposure to the potentially booming (no pun intended) nuclear industry.

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