Cameco Corp.: Should This Stock Be on Your Contrarian Buy List?

Cameco Corp. (TSX:CCO)(NYSE:CCJ) is up 25% since early February. Are more gains on the way?

| More on:

Cameco Corp. (TSX:CCO)(NYSE:CCJ) has been on an upward trend since early February, and investors are wondering if the beleaguered stock might finally be on the verge of a long-term recovery.

Let’s take a look at Canada’s largest uranium producer to see if it deserves to be on your contrarian buy list today.

Rough run

Cameco was a $40 stock back in early 2011 when uranium prices were close to US$70 per pound. Then the tsunami hit Japan, and everything changed.

The Fukushima disaster forced Japan to shut down its entire fleet of nuclear reactors, and countries around the globe took a step back to evaluate the future of their nuclear energy programs. This sent uranium prices into a multi-year tailspin, bottoming out just below US$20 per pound.

Producer stocks followed suit, including Cameco, which has traded below $10 per share in the past 12 months.

At the time of writing, uranium spot prices remain near the lows, barely trading above US$20 per pound. Cameco is at $13.40 per share.

Bull case

Fans of the sector point to the long-term outlook for the industry and Japan’s determination to get its reactors back in service. As of mid-February, Japan only had five of its 42 operable reactors back in commercial operation. The country has struggled with legal battles and technical challenges in its efforts to get the fleet in service, and those headwinds are expected to continue.

Eventually, the country will make more progress, but investors shouldn’t expect a wave of restarts.

Regarding growth, annual uranium demand could rise as much as 50% through 2030, as countries around the world ramp up their nuclear energy programs. China and India, among others, face growing electricity demand and plan to expand their nuclear energy capacity. Today, more than 50 new reactors are under construction around the world.

Producers have cut output and shelved development plans to the point where the industry could eventually see a supply squeeze. If that scenario materializes, uranium prices could rocket higher.

Bear case

Secondary supplies continue to put pressure on the market, and utilities are comfortable filling demand gaps with purchases in the spot market. Cameco sells most of its uranium on long-term contracts that were signed at much higher prices. As those agreements expire, the average realized sale price is at risk of falling, unless buyers get nervous about supply and begin to sign new multi-year agreements.

Cameco is also caught up in a battle with the Canada Revenue Agency (CRA) over taxes owed on earnings generated through a foreign subsidiary. The first round of the legal proceedings wrapped up last September and a decision is expected six to 18 months from that time.

If Cameco loses the case, it could be on the hook for more than $2 billion in taxes and penalties.

Should you buy?

The stock is up 25% since early February, despite ongoing weakness in uranium prices. A shift of funds back into commodity plays might be part of the reason for the mini-rally, but I’m not convinced this is the time to step in and buy the stock.

If you have a contrarian style and think the long-term opportunity is attractive, I would at least wait for a decision on the CRA case before adding Cameco to the portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool is short shares of Cameco. Fool contributor Andrew Walker has no position in Cameco.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »