There are plenty of old sayings that advise investors to swim against the tide and invest into troubled sectors when pessimism is at its worst. That is all well and good, but precious few investors have the self-confidence and long-term focus to just ignore a 20% or 30% near-term loss on a new position. With that in mind, then, investors should certainly do their due diligence on now-troubled nuclear power stocks but let the dust settle a bit before taking on new positions.

IN PICTURES: 9 Simple Investing Ratios You Need To Know

Shoot First, Ask Questions Later
In the wake of the combined earthquake and tsunami disaster in northeastern Japan, and the resulting emergencies at multiple nuclear facilities in Japan, public fear about nuclear power is once again running high. With activists already jumping on their airwaves to exaggerate and misinform, it seems inevitable that the nuclear industry has lost whatever momentum and credibility it had rebuilt in the 25 years since the Chernobyl disaster.

Investors need go no further than the stocks of those companies exposed to the nuclear power industry. Go-to names like uranium miners Cameco (NYSE:CCJ) and Denison (AMEX: DNN) and engineering and construction firm Shaw (Nasdaq:SHAW) were among those that took a significant drop in the early trading after the disaster struck. Since then, even well-diversified names like General Electric (NYSE:GE) (which has some, but not a lot, of nuclear energy exposure) have come under selling pressure.

The Follow On Effects
As Japanese engineers struggle to limit the damage and health risks at their nuclear facilities, several governments have decided to implement proactive caution. Germany and Switzerland have suspended the approval process for new reactors and Germany will be shutting down some older reactors for a safety reassessment. Though the U.S. government has not yet announced any similar moves, it seems hard to imagine that an administration that shut down drilling in the Gulf of Mexico after the BP spill will not impose some sort of moratorium or reevaluation.

That is difficult news for European utility operators like RWE and EON (Nasdaq:EONGY), as nuclear generation is a significant factor for them. In the U.S., the impact on utilities like Exelon (NYSE:EXC) is less significant so far as nuclear is a smaller percentage of the U.S. power grid.

Hope Vs. Reality
As fears about nuclear power spread again, green power is back in the spotlight. Solar companies like JA Solar (Nasdaq:JASO) and Suntech (NYSE:STP) and wind power names like Vestas (Nasdaq:VWDRY.PK) have drawn stronger bids since the earthquake, presumably on the theory that nuclear energy is dead in the water and only green solutions can fill the gap. (For related reading, see Going Green With Exchange-Traded Funds.)

Unfortunately, the limits of science and engineering do not change just because activists want them to change. Solar and wind are nowhere near viable sources of baseload power today and hoping they will get better does not produce the needed power today. Consequently, utilities and governments still have the same menu on undesirable choices - slow strangulation with cheap coal, risking public furor with nuclear, or going with natural gas. The last choice, natural gas, is a pretty credible option in North America, but much less viable in Europe where over-reliance on Russian gas imports has already become both an economic and political issue.

Risk Versus Reward
There are compelling reasons to look at the nuclear power sector today. Nuclear energy is not going to go away and companies like Cameco, as well as junior miners like UR-Energy (AMEX:URG) and Hathor Exploration, will likely see higher uranium prices in the not-so-distant future. Likewise, companies like Shaw and Fluor (NYSE:FLR) are not so committed to nuclear energy that they will be left out if utilities have to go with other energy sources for their new plants. Even a company like EnergySolutions (NYSE:ES) can do well enough from legacy nuclear power business that will not go away overnight.

The Bottom Line
All of that said, an investor jumping into the sector today has to have courage and an ability to ignore short-term losses. After all, the news coming from Japan is not likely to get better right away and a potential worsening of the situation at those nuclear plants is a major risk factor. There are plenty of credible reasons to believe that nuclear power will not go away and that stocks are getting hit more by emotion than sober long-term analysis, but investors who cannot tolerate the prospect of 20% near-term losses should not volunteer to swim against the tide right now. (For more, see Taking Bets On The Uranium Miners.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  6. Stock Analysis

    Analyzing Porter's Five Forces on Under Armour (UA)

    Learn about Under Armour and how it differentiates itself in the competitive athletic apparel industry in light of the Porter's Five Forces Model.
  7. Stock Analysis

    The Biggest Risks of Investing in Qualcomm Stock (QCOM, BRCM)

    Understand the long-term fundamental risks related to investing in Qualcomm stock, and how financial ratios also play into the investment consideration.
  8. Stock Analysis

    The Biggest Risks of Investing in Johnson & Johnson Stock (JNJ)

    Learn the largest risks to investing in Johnson & Johnson through fundamental analysis and other potential risks. Also discover how JNJ compares to its peers.
  9. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  10. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
RELATED FAQS
  1. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  2. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  3. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  4. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  5. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
  6. What is the formula for calculating earnings per share (EPS)?

    Earnings per share (EPS) is the portion of a company’s profit that is allocated to each outstanding share of common stock, ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center