In the stock market, you rarely buy a stock after the price has risen. The probability of earning higher is more significant when the value of a stock has fallen. But when the stocks are tumbling, it doesn’t always mean buying opportunities.
Cameco (TSX:CCO)(NYSE:CCJ) and Ensign (TSX:ESI) are two companies in a rough patch. The stocks’ values have been down since the end of 2018. Stay away from both unless you can find real catalysts that would precipitate a rebound.
Problem with uranium
Cameco is down 25.7% year to date, although the stock has traded mostly sideways over the last five years. This $4.55 billion company is a producer and seller of uranium worldwide. Uranium provides nuclear fuel to generate electricity. Unfortunately, the lead product is what’s creating the headwind for Cameco.
Uranium is a tough commodity to sell at present. The Fukushima Daiichi nuclear disaster in Japan on March 11, 2011, tainted the heavy metal’s image. An earthquake, followed by a tsunami, disabled three nuclear reactors. The incident released uranium and other harmful debris released. The event was one of history’s few radioactive accidents.
Since the accident, the sector has become challenging. There was an oversupply of uranium for seven years. The only choice of the uranium miners was to cut production. Also, the price of uranium has fluctuated, although it has been mostly flat for the last five years. Iron ore and copper have better potentials.
Saskatchewan-based Cameco is one of the world’s largest providers of uranium fuel, but the outlook is not rosy. Uranium supply needs to shrink for demand to return. That would cause the market to tighten and push uranium prices up. Renewable energy could also out-compete nuclear power.
Ensign is the second-largest driller in Canada and a world-class company with significant drilling operations internationally. The current share price of this $482.5 million oil services provider is nearly 36% less than its value at the start of the year.
The return on capital of this industry innovator has been consistent over the years. However, in the last few years, business has slackened. That is a problem with cyclical stocks. When business goes south, so will your investment.
It’s a challenge to be an oil services provider. Ensign’s performance depends on the energy sector’s performance. If the industry is performing poorly, services companies are the first in line to get cut. When the industry is doing fine, Ensign and similar companies are the last to pick up.
Ensign made a profit in 2018 after three consecutive years of losses. In the first half of 2019, the company’s revenue increased by 58% to $525 million but posted a net loss of $53.9 million. The figures aren’t significant, but passive investors stick to the Dividend Aristocrat because of the over 9% dividend yield.
Assess the risk profile
You should exercise caution before buying tumbling stocks. The oversupply of uranium poses a big problem for Cameco. Ensign needs energy prices to improve to speed up business. Therefore, it is in your best interest to look for other stocks with lower risk profiles.
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Fool contributor Christopher Liew has no position in any of the stocks mentioned.