Friday, February 17, 2012

CCJ: Fueling the nukes

Cameco Corp. (CCJ) mines uranium, refines it and processes it into fuel for nuclear power plants.

As it becomes clear that the wind, the sun and biomass won't provide enough energy to replace fossil fuels, nuclear increasing looks to be one possible future. Cameco, from its base in Saskatoon, Saskatchewan, Canada, is positioned to profit from that future.

Every company is a narrative, and its stock is an avatar for the story. Cameco's narrative plays on optimism and hope. Energy. The future. Turning away from fossil fuels and the political/environmental baggage they carry.

It is easy to lose sight of the fact that Cameco is an extractive industry dealing with a commodity that carries its own heavy load of political and environmental baggage I treat oil stocks with extreme caution because so much of what happens to the companies depends upon political decisions outside of corporate control. Likewise, uranium.

CCJ had the second-most bullish chart of 16 selected at random from 675 large-cap stocks. The most bullish chart belonged to CMG, which I analyzed on Feb. 8. I've chosen CCJ to avoid the repetition. DG and NXPI completed the final four.

CCJ's chart began its current rise from $17.39 on Dec. 29, 2011 to today's high of $24.10.

The uptrend followed a shattering decline from a peak of $44.81 in February 2011. From a very long term standpoint, CCJ has been tracing a triangle since 2007. That's a fancy way of saying that it has been trendless amid swings of decreasing magnitude.

There is, of course, money to be made from those swings.

From a micro-level, the price rose sharply since December into late January, and then stalled and corrected down to around $22. What makes the chart attractive is that today the price broke above the $24.08 correction high for the first time. It pulled back intraday to below $24, and the question will be whether the breakout will follow through.

Analysts say CCJ is a strong sell. From a cursory glance at the financials, that assessment is puzzling.

Return on equity is 9%, a respectable level for a workaday company. Long-term debt stands at 21% of equity, which is quite good.

Institutions own 64% of the shares -- not top rung, but it shows that there is some interest among people who manage vast quantities of money. In fact, they like it so much that they've bid the price up so that it takes $3.88 in stock to control a dollar in sales.

Earnings are all over the place, but that is to be expected from a minerals operation. However, the company earlier this month lowered its revenue estimates by 5% to 10%. Some commentators tied that action to doubts over the take-up of nuclear energy.

So it all comes back to the narrative: Will nuclear carry the world to a bright future of clean and abundant energy, or continue as a pariah amid memories of Three Mile Island, Chernobyl and Fukushima.

It strikes me that the analysts are confusing long-term narratives with shorter-term prospects. The market corrected for the revenues estimate over three days, and then reclaimed that territory over three more days. It's done. Time to move on.

CCJ is liquid, with average volume of 2.5 million shares a day. There is a wide inventory of options with three- and four-figure open interest across the board.

Implied volatility, at 35%, is at six-month lows for CCJ and declining further. The volatility shows that traders give a 68.2% chance that the price will close between $21.44 and $26.20 a month from now.

The next earnings announcement is scheduled for May 5. The stock goes ex-dividend on March 28 for a quarterly payout worth 1.68% annualized.

Decision for my account: I'm passing for now because the price withdrew below the breakout level. I'll revisit the decision upon a persistent breakout above the $24.08 level. The strongly negative analyst assessment give me pause. I'm not sure they're right, but what do they know that I don't? (Answer: Probably quite a bit.)

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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