Investing in commodities can be a risky proposition, especially if you have little knowledge about this asset class. Generally, commodities are cyclical, as the prices depend on supply and demand, making them highly volatile in the short run. This year, the price of uranium has surged higher, which means companies that mine this commodity have seen a significant spike in their stock prices.
According to a report by Market Insider, the spot price of uranium has risen by 65.5% year to date, making it one of the hottest commodities in the energy sector. Does this make Cameco (TSX:CCO)(NYSE:CCJ) stock a top bet right now?
Cameco stock is up close to 60% in 2021
One of the best-performing stocks on the TSX this year has been Cameco, which has gained 58% year to date at the time of writing. Cameco produces and sells uranium. It operates in two segments: Uranium and Fuel Services. The Uranium business is involved in the exploration as well as the purchase and sale of uranium concentrate. The Fuel Services business is involved in the refining, conversion, and fabrication of uranium concentrate.
The primary reason for the uptick in Cameco stock can be attributed to increasing prices of uranium, which, in turn, was on the back of rising investments in nuclear reactors. Governments were apprehensive of investing in nuclear reactors due to the Fukushima disaster in Japan 10 years back. The prices of uranium then fell to a multi-year low. But the shift towards clean energy solutions is inevitable, and nuclear power is a source that is likely to drive the transition.
CCO stock gained pace on the back of recent analyst upgrades as well. RBC Capital raised the price target on Cameco stock to $26 from $17 due to rising spot prices of uranium as well as improvement in investment sentiment surround this space. GLJ Research also raised the price target of Cameco stock to $38 from $27, as the introduction of a uranium-based ETF might act as a massive potential catalyst going forward.
But investors should also understand that commodity prices can rise to a certain extent, after which they are likely to stabilize or experience a decline. According to analysts, this will be around US$60 per pound for uranium, which is currently trading at US$50.
Another reason for worry is that Cameco has been hugely popular on the social media platform Reddit. It suggests that the recent spike in Cameco’s stock price may be due to the manipulation of retail traders on Reddit.
In fact, Cameco stock has already lost 12% in market value in the last five trading sessions due to the broader market selloff as well as a cautious outlook by Morgan Stanley in the near term.
CCO stock is overvalued
Cameco stock is valued at a market cap of $10.66 billion. Analysts tracking CCO stock expect its sales to decline by 18.6% year over year to $1.47 billion in 2021 and then rise by 3.9% to $1.52 billion. The company is still reporting an adjusted loss and is forecast to end the year with a loss per share of $0.22.
We can see that Cameco stock remains a high-risk bet given its steep valuation and the underlying volatility surrounding meme stocks.