Nuclear Energy - The Emotion Trade Is In Full Swing

By Stephen D. Simpson, CFA | March 17, 2011 AAA

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.

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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.)

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