Dr. Steven Chu is the Nobel Prize-winning physicist who now serves as the U.S. Secretary of Energy. He is a brilliant man from a family of leading researchers and scholars. He is also charming, engaging, and influential. From my perspective, the conclusion is an easy one: When Dr. Chu speaks, we should listen.
I was a bit skeptical about the pop in the "nuclear stocks" after the mid-term elections, but the political landscape seems to be changing. We can see the effect in our weekly analysis of the ETF markets, but I want first to discuss the background factors.
The Obama administration started off with a tilt toward alternative energy, but last week there was a significant change. As part of what is being hailed as a new era of compromise with Republicans, Dr. Chu included nuclear as part of the alternative energy program. This shift recognizes regional and political differences, so it could be important. As is the case with any compromise, there was an instant reaction from nuclear opponents. I have no firm prediction on how it will eventually play out, but the odds clearly have shifted.
The fundamental change is reflected in the behavior of the stocks. I'll get to that, but first a little background on how we approach sector analysis.
Traders all seek rewards, but they have differing appetites for risk. It is important to find a method that suits your personality and needs. Our short-term trading systems are basically trend-following, but also include recognition of cycles and a touch of anticipation. Since we apply the method to ETFs, we call it the TCA-ETF system. We follow two versions of this method, designed for two hypothetical clients (Oscar and Felix) with different needs and risk appetite. For convenience, we have named the models based upon the intended clients.
Featuring Nuclear Energy
We trade nuclear energy via the Van Eck Global Nuclear Energy ETF (NYSEARCA:NLR). The fund "seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the DAXglobal® Nuclear Energy Index." There are only 24 holdings, with a range of market caps. The top five make up about 40% of the fund, and the top 10 another 25 percent. The holdings include uranium mining, storage, and enrichment stocks, as well as those involved in plant construction and power generation. The largest geographical weight is in Canada, with the U.S. second. Forty-four percent of the fund is outside of North America.
The price and fundamentals are attractive and interesting. The P/E ratio is about 20 with a dividend yield of 1.7%; the beta is only 1.2. The sector has recently moved by nearly 20%, but is up less than 10% on the year. Here is the chart:
[Click all to enlarge]
You can see the recent move as well as the price consolidation over the last few weeks. Some might see an upside-down head and shoulders, although our models do not identify that type of pattern. I always look at various time frames in charts, and this time it is especially illuminating.
This chart highlights a period I regard as important -- the time right before the fall of Lehman in September of 2008. With any stock or sector, it is interesting to ask whether this initial price target has been regained, and whether conditions now are better or worse. By that test, there is room to run.
We always survey commentary from other experts on the ETFs in our buy zone. There are some interesting comments on NLR.
- Joseph L. Schaefer at ETF Daily News points out the need for some common sense in analyzing the role of atomic energy. The article has a nice historical perspective.
- Another ETF Daily News story emphasizes the role of uranium stocks. Good stuff from Tony D'Altorio.
There is not too much discussion of this sector, despite the fundamental and technical changes. It is currently our top-rated holding for Felix.
This Week's Results
Felix, the cautious approach, has fully participated in the market rally. The sector ratings have reflected the strength, and nearly 70% of the stocks are out of the penalty box.
I am seeing new sectors emerge from the penalty box on a daily basis. We are closely watching KBE, for example.
Weekly TCA-ETF Rankings
We are currently fully invested in our Felix ETF program and also for those following Oscar (riskier and more opportunistic in nature). This flows from the positive market ratings that we report in our (almost) weekly update on the market.
Please note that these are not recommendations. Investor needs and risk tolerance varies. We hope everyone finds the ratings to be a useful supplement to their own work. The recommendations can change quite rapidly in this environment. It is quite possible for investors with different time frames to reach opposite conclusions about a specific trade.
Here are the current rankings for both Oscar and Felix; more on them can be found here.