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Contrarian Investors: Should You Own Cameco Corp. or TransAlta Corporation?

Contrarian investors are always searching for beaten-up stocks that could be on the verge of a recovery.

Let’s take a look at Cameco Corp. (TSX:CCO)(NYSE:CCJ) and TransAlta Corporation (TSX:TA)(NYSE:TAC) to see if one is attractive right now.

Cameco

Cameco was a $50 stock a decade ago and even traded as high as $40 per share in early 2011.

Then the tsunami hit the coast of Japan, and everything changed for the global uranium market.

What happened?

The resulting Fukushima nuclear disaster forced Japan to shut down its entire fleet of nuclear reactors. This sent uranium prices on a downward spiral from US$70 per pound to the current price of about US$20.

Cameco’s stock has gone along for the ride, bottoming out near $10 per share in late 2016. At the time of writing, Cameco trades for $12.60 per share.

Japan is struggling to get its nuclear fleet back online. In fact, fewer than five of the 42 operable reactors are currently in commercial service.

On the positive side, global demand for uranium is expected to grow by 50% through 2030 as new reactors are built to supply increasing electricity demand. For the moment, however, secondary supplies are offsetting production cuts, and the market isn’t expected to improve much in the near term.

Cameco is also caught up in a nasty battle with the Canada Revenue Agency over taxes owed on earnings from a foreign subsidiary. If Cameco loses the case, it could be on the hook for more than $2 billion in additional taxes and penalties.

TransAlta

TransAlta’s stock chart is just as ugly.

The company traded for $30 per share a decade ago and bottomed out close to $4 per share in early 2016.

Falling electricity prices, high debt, and opposition to coal-fired power plants really hit the stock hard and forced management to cut the dividend several times.

Power rates are not expected to improve much in Alberta in the near term, but TransAlta appears to have turned the corner.

What’s up?

Alberta negotiated deals with coal-fired power producers last year that will pay the companies a fee to help them close some plants and transition others to natural gas.

In addition, the province is changing the power market to pay producers for capacity as well as the electricity they produce. This should provide the incentive needed to invest in new renewable energy facilities to replace the lost production for the coal-fired plant that will be decommissioned.

TransAlta has committed to remain a major player in the market.

Some pundits look at the value of TransAlta’s 64% of TransAlta Renewables Inc. (TSX:RNW) and see a huge buying opportunity.

The stake is worth just under $2 billion in value at the current stock price. TransAlta’s market cap is about $2.4 billion, so investors pick up the part of TransAlta that isn’t already dropped down into RNW for very little money.

Is one more attractive?

At this point, I would make TransAlta the first pick. The uncertainty over the company’s future in Alberta should be cleared up, and management is doing a good job of reducing debt.

The stock probably won’t rocket higher, but a slow grind to the upside could be underway.

Cameco looks good over the long term, but I would avoid the stock until uranium prices finally recover and the CRA situation is resolved.

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Fool contributor Andrew Walker owns shares of TransAlta.

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