At the mid point of 2012, it seems an opportune time to review nuclear energy and uranium equities performance year-to-date. Although much could change as the year progresses, the 1H2012 appears to be in line with our expectations.
- The market dynamic during the first half of 2012 has been similar to that of the broader market, rallying strongly in the first few months, only to reverse course through Q2. NLR and URA have lost -3.8% and -8.1% YTD and -17.8% and -30.7% respectively from the highs of 1Q12. Worries about Japanese nuclear fleet downsizing and the speed of China's nuclear development program came back into light. And while the worries have eased somewhat, a considerable uncertainty facing the industry still remains.
- As expected, there has been a bias toward the typical down-market favorites-large caps, growth and defensives-while many of the smaller, less liquid names have struggled. As nuclear energy investors continue to be risk averse, quality and liquidity remain at a considerable premium. In June spread between Cameco (CCJ) and some of its less liquid and lower quality comparables reached 2-year highs (even when adjusted for beta).
- Top-down factors remain highly influential. Although company specific fundamental analysis does undoubtedly matter, during the first half of the year it often took a back seat to broader macro factors.
- Correlation within the sector remained very high and often exceeded levels of 2009-2010. And although we expected elevated correlation to stay with us throughout 2012, we were surprised to see it exceeding that of the previous 2 years.
- Investment sentiment came in waves: Declining volatility and improving macro sentiment during the 1Q helped reduce fear and foster an overall feeling of cheer among institutional as well as retail buyers of nuclear energy stocks. Industry ETFs generally traded at a premium and hopes for the returning nuclear bull were flying high. Yet the optimism did not last and we spent the 2Q reversing these trends with investor sentiment hitting a new 12-month low in May of this year. The sentiment remains soft, but off the lows for the year and although institutional participation has improved, insider activity and retail participation continue to lag.
- Multiple expansion (or contraction in 2Q12) is still the biggest driver of the sector performance with earnings and dividends taking a definitive back seat. This is not unusual for nuclear equities, particularly uranium stocks, and we expect this trend to continue in the second half of the year and beyond.
- Earnings results have been mixed with uranium stocks (with very few exceptions) missing analyst expectations. This was not only a case of disappointing company performances, but also a case of overly optimistic analyst expectations. And while a perma-bull attitude may help sell buy recommendations, it does not bring them any closer to reality. As a result we should expect more surprises to analyst expectations as the year progresses.
Going into the 2nd half, nuclear energy investors should expect further volatility on both up- and down-sides with stocks with the highest institutional ownership leading the way. We will continue to be held hostage by policymakers in Europe, the U.S. and Asia affecting both macro and industry specific factors. On the nuclear side, the outcome of Japan's decision on its energy policy (expected in August/September) and additional details on Chinese nuclear development would be the two most important catalysts for the nuclear market.