Tis the Season for Nukes

10/03/2007 12:00 am EST

Focus: COMMODITIES

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Elliott Gue, editor of The Energy Strategist and The Energy Letter, expects uranium miners and nuclear power providers to outperform for the rest of the year.

The final quarter of the year is always a crucial period for the energy markets. The quarter marks both the beginning of the winter heating season and a time when refiners look to rebuild their crude oil inventories. Often, trends that emerge during the quarter carry through into the new year.

With crude oil prices hovering around $80 per barrel and natural gas recovering from its midsummer lows, the fourth quarter of 2007 promises to be even more pivotal for the energy patch than normal.

The fourth quarter is a great time to look for a strong move higher in uranium mining stocks. There appears to be a strong seasonal tendency for uranium miners to bottom out sometime between the end of August and late October and rally through into 2008.

In 2005, 2006, and 2007, Cameco (NYSE: CCJ), the biggest pure-play uranium miner and a benchmark for the rest of the industry, had a strong tendency to outperform [the Standard & Poor’s 500 from late October through at least early February]. That’s even more significant when you consider that the fourth quarter is seasonally a positive one for the market in general. So, Cameco actually outperforms a rising market during this time of the year.

I’m not normally a big fan of pure seasonal arguments for buying stocks. But, this tendency does make some fundamental sense. After all, the fourth quarter does bring the onset of the winter heating season in the Northern Hemisphere, a time of rising demand for electricity and nuclear power.

In addition, volume in the spot market for uranium tends to decline during the summer months. This spot market is never particularly liquid, but during the summer months, volume all but fades away. As spot market activity picks up again in the fall, that refocuses attention on the uranium markets.

This year, the ratio appears to have bottomed in late August, somewhat earlier than normal. Nonetheless, I believe uranium mining firms are now in the first few weeks of a seasonal rally that will carry into 2008. (Cameco’s stock closed below $44 Tuesday—Editor.)

In addition to this seasonal effect, investors shouldn’t ignore recent decision by NRG Energy (NYSE: NRG) to apply for a new nuclear-plant construction permit. This is the first construction permit application to be filed in the US for nearly three decades. While this single plant won’t mean much for global uranium demand, it’s a sea change when it comes to sentiment. Remember that many investors, no matter where they’re based, remain stubbornly US-centric, so a new nuclear plant in the US would serve to underline the fact that a nuclear renaissance is under way.

The status of this application will be widely watched by the rest of the industry. It’s likely to become a road map for other would-be nuclear plant builders in the US. (NRG closed at around $42.50 Tuesday—Editor.)

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