Einstein's Hedge

 |  Includes: FSLR, LTBR, NLR, NUCL, URA, WMT
by: Modernist

Fukushima put a question mark next to nuclear. Here are some related ETFs showing the hand of Fukushima:

The Westerners who are now personally scared about radiation were scared of terrorists in the decade after 9/11. Eventually they will forget about radiation just like they forgot about terrorists. On an individual survival level these people should be more concerned with diabetes, hypertension, and inebriated drivers. But then, they wouldn't be able to eat, drink, and drive the way that they do. Let's be honest. Most people aren't really concerned with managing their exposure to danger; they're actually concerned with managing their exposure to uncomfortable ideas. Nuclear has dropped due to fear, not danger. There is substantial infrastructure damage in Japan but engineers know how to learn from their colleages' mistakes.

The real problem is that nuclear production is centralized and illiquid both in scale and timeframe. Nuclear plants are expensive, long-term bets. Confidence is necessary for any and all new investment. But electricity is not a bubble. Quantity demand will grow with demographics. The global middle class is getting bigger. The world is becoming more electronic. And nuclear is going to be a part of the supply. Nuclear is dollar-effective and carbon-minimal. With this "triple bottom line," nuclear is the moderate amongst energy extremes. The most forseeable catastrophic downside risk to nuclear power plants is not hydropower, LNG, wind, or solar: the risk is fusion, which would dwarf the fission status quo - and this is highly unlikely to happen any time soon. We have to remember Moore's Law applies to microchips, not batteries. Fast growth just doesn't happen in energy technology. The panic in nuclear gives us a window of uncertainty through which to bet on a sure thing: energy grows slowly.

I like a small cap, Lightbridge (NASDAQ:LTBR) which is in pre-approval stage for intellectual property to make existing and future nuclear plants safer and more profitable. LTBR is like a biotech pharmaceutical: if its tech gets approved, the stock will shoot up; if not, the stock will dive. Before Fukushima, LTBR was already talking about making plants safer. So if there was any justice in the world, LTBR would have lost less money than other nuclear stocks when Fukushima validated LTBR's safety advocacy.

In the chart above, we see LTBR has not significantly outperformed status-quo uranium miners, even though Fukushima was a status-quo failure.

I think the market has not done its homework in modeling LTBR's upside. I can't blame the market - most people have never heard of Lightbridge. 40 million is a small company - I get it. Here's the thing. Post-Fukushima, the market is modeling LTBR's upside in direct proportion to expected decline in nuclear market share. But in reality the upside is not entirely dependent on growth in new nuclear plants. Current nuclear plants represent a huge portion of global energy production and are sunk costs. Lightbridge, if approved, is going to license intellectual property to these nuclear plants. This intellectual property will increase their marginal efficiency. Who is going to turn down an opportunity to improve revenues on sunk costs by 10%? Even regretfully nuclear companies like Exelon (NYSE:EXC) are getting on board with LTBR's potential.

But nuclear is not the only energy bet on sale at the moment. Check out First Solar (NASDAQ:FSLR):

To hedge the centralization of nuclear, I like long exposure to solar. Solar is decentralized, in that people will pay a $/kwh premium to put panels on their roofs, so they can feel/be independent. Solar use is "open source." But solar manufacturing is still a scale game, which is why I love the sell-off in FSLR. "Wal-Mart" (WMT( is a nice adjective for what may happen to this margin monopolist over the coming decades.

We can thank Einstein for the physics that led to solar and nuclear. The market has been charitable enough to undervalue both at the same time. Centralized or uncentralized future, I am holding Einstein's Hedge.

Disclosure: I am long FSLR, LTBR, URA. I'm pessimistic about Europe and global financials and may have other positions reflecting this that are related to the content of this article.