Following weaker uranium prices and prospects for slower pace of Japanese nuclear restarts more research houses are reducing their expectations for uranium equities. This week Bank of America reduced price targets for a number of uranium equities under their coverage, including Cameco (CCJ), Uranium One (SXRZF.PK), Paladin Energy (PALAF.PK) and Energy Resources of Australia. We welcome the adjustment and expect more to come from other analysts in the near future.
Although not every analyst covering uranium equities is the same, over the last 12 months the research community as a whole has been overly optimistic and failed to recognize near-term challenges facing the industry. As a result, there is a substantial gap between research suggestions and actual company performance post Fukushima accident (see details here).
Over the past several months we have repeatedly argued for the need to adjust analyst expectations and glad to see the research community moving closer to reality. To be clear, this is NOT a call for lower uranium equity prices. There are many reasonably priced companies in the uranium sector. This is rather a recognition that analysts serve an important role in providing guidance and insight for the uranium investment community. However, unreasonably high expectation detached from the near-term fundamentals are causing more damage than good to the uranium equities. First, they distort investor expectations and setting up companies for a failure to meet or exceed the targets. Second, such expectations attract speculative buyers, which tend to flee as soon as the promise of immediate outsized returns fails to materialize. Not to mention that excessively optimistic recommendations are hardly a way to win over clients.
While the long-term fundamentals for the uranium industry paint a more attractive story, near-term challenges continue to dominate investor sentiment. Investors should look for more clarity on nuclear energy policies in Japan, China, France and United States as these nations represent nearly half global operating reactors and more than half of expected nuclear power growth. Progress on nuclear energy initiatives in these countries can serve as powerful catalysts for uranium stocks, such as Cameco, Paladin Energy, Uranium One, Global X Uranium ETF (URA) and others. Meanwhile, the analyst community as well as investors in uranium stocks should adjust their expectations towards a slower and uneven recovery.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.