As markets continue their love affair with the central banks' actions, the sentiment carried over into the nuclear equity markets as well. Just last week Global X Uranium ETF (URA) went up an impressive 5.91%, while Nuclear energy ETF (NLR) has registered a solid 3.75% gain. A number of analysts are quick to jump on the "bull wagon" and declare the return of nuclear optimism and expectation of new super returns. However, to the careful investor there is more to this rally than meets the eye.
First, the industry gains were far from universal. In fact, some of the leading, better quality industry stocks did not follow the trend. This week the largest publicly traded uranium pure play, Cameco (CCJ), lost 3.2%, so did one of the fastest growing producers, Uranium One (OTC:SXRZF) (-3.12%).
The best performance of this rally were the worst performers of the year. USEC (USU), which lost over 60 % of its value YTD, advanced nearly 25% this week alone. Uranium Resources (URRE) whose 40% YTD loss puts it among the worst performers of the industry, gained a hefty 23% this week alone. Other champions of the week include Paladin Energy (OTCPK:PALAF) (6 Months loss - 27% / weekly gain - 11%) and Uranerz (URZ) (6 Months loss - 27% / weekly gain - 18%). While we are happy for the gainers, investors should understand that for the most part the gains were not driven by improving industry or individual company fundamentals. They are rather driven by the change in macro sentiment, which for many stocks resulted in short squeezes. (URRE, USU were among the most shorted stocks in the sector).
Unfortunately, near-term fundamentals for nuclear energy and uranium stocks continue to be challenging. Nothing proves this more than events of the week. On Friday, Japanese administration formally announced its goal to phase out nuclear power by 2040. While it is still unclear how this populist goal will be achieved, if it materializes the effect on the long term prospects of nuclear industry would be decidedly negative. Japan is the 3rd largest nuclear nation worldwide contributing roughly 10% of global nuclear generating capacity.
At the same time, 6000 miles away from Japan, French President François Hollande made his contribution to the populist agenda by confirming his campaign pledge to reduce the share of nuclear energy in France electricity mix to 50% (from current 78%). President Hollande also plans to cut 2040 CO2 emissions by 40%. How both goals can be achieved is unclear even to members of Hollande's administration. But why worry yourself with execution details, if this may help to improve the approval ratings.
Whether the macro driven rally in nuclear equities can continue into next week remains to be seen, however, as demonstrated by previous sentiment driven rallies of October 2011 and February 2012, it is unlikely to be sustainable without improvement in near-term industry fundamentals.