Contrarian investors are always searching for beaten-up stocks that could be on the cusp of a rebound. Let’s take a look at Cameco Corporation (TSX:CCO)(NYSE:CCJ) and Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) to see if one is an attractive bet today. Cameco Cameco’s stock has been on the slide for several years, and there isn’t much hope for a recovery anytime soon. What’s going on? The Fukushima nuclear disaster in 2011 forced Japan to shut down its entire fleet of nuclear reactors, and the country is still struggling to get them back in service. In fact, only three of the country’s 43…
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Contrarian investors are always searching for beaten-up stocks that could be on the cusp of a rebound.
Cameco’s stock has been on the slide for several years, and there isn’t much hope for a recovery anytime soon.
What’s going on?
The Fukushima nuclear disaster in 2011 forced Japan to shut down its entire fleet of nuclear reactors, and the country is still struggling to get them back in service. In fact, only three of the country’s 43 operable facilities are currently generating electricity.
Public opposition and operational challenges continue to stall the process, and the general consensus among analysts is that progress will remain slow.
The outlook is more positive in other countries. India and China are ramping up their nuclear development programs, and around the world, more than 60 new reactors are under construction. As a result, annual uranium demand is projected to rise 50% by 2030, which should bode well for Cameco and its peers over the long term.
For the moment though, the market remains oversupplied, and uranium is trading at an abysmal US$25 per pound. In early 2011 the price was close to US$70.
Cameco has a company-specific problem that is also a concern. Management is caught up in a nasty battle with the Canada Revenue Agency (CRA) over taxes owed on income generated by a foreign subsidiary. The case is now before the court, but a decision is not expected before late 2017 at the earliest. If Cameco loses, it could be on the hook for more than $2 billion.
Baytex used to be an investor favourite in the Canadian oil patch, but an ill-timed acquisition right at the top of the market has proven to be a disaster for shareholders. In fact, the stock fell from $48 per share in June 2014 to $2 per share earlier this year.
The plunge in WTI oil from US$100 per barrel to below US$30 had many investors concerned that Baytex was not going to survive 2016. The subsequent rebound in oil to US$50 per barrel has provided some relief, but Baytex is still under pressure.
Cuts to the capital plan are taking a toll on production. The company averaged just over 70,000 barrel of oil equivalents per day (boe/d) in Q2 2016 compared to nearly 85,000 boe/d in the same period last year. Average annual output for all of 2016 is expected to be just 67,000-69,000 boe/d.
The company is still carrying too much debt and had its credit facilities cut as a part of the renegotiation of terms with lenders.
As a result, Baytex could be in big trouble again if oil decides to reverse course.
Should you buy these stocks?
Cameco is a low-cost producer and holds some of the best uranium deposits on the planet. At some point, the market will recover, but the CRA issue is a big question mark right now, and more pain could be on the way for the industry in the near term.
Baytex remains volatile. If you believe oil has bottomed, this stock might be attractive, but there is a strong possibility it could retest the 2016 low if the market rolls over again in the coming months.
I think the downside risk remains significant for both companies. As such, contrarian investors should probably look for other opportunities.
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