Nuclear Shorts for the Near-Term

by: Rash Menaria

After the earthquake and tsunami, two of Japan’s nuclear plants, Fukushima Daiichi and Fukushima Daini, are experiencing significant problems as their cooling systems have failed. This disaster, like Three Mile Island and Chernobyl, may cause significant problems for the nuclear industry going forward. With increased scrutiny around nuclear power plants globally, it’s likely that some new build plans are delayed or even cancelled.

Here are some of the stocks which are likely to bear the brunt of negative sentiments for nuclear power industry and underperform in the near term.

Uranium suppliers: With lower uranium demand from Japan as some of its nuclear power plants are shut down for very long inspection periods, there is a good chance of spot price weakness. Uranium suppliers like Cameco (NYSE:CCJ), Denison Mines (NYSEMKT:DNN), Paladin Energy (OTCPK:PALAF), Uranium Energy (NYSEMKT:UEC), Uranium Participation, Ur-Energy (NYSEMKT:URG), Uranium One (OTC:SXRZF). In particular, Denison Mines, Uranium-One and Uranium Participation are likely to be most affected due to their sensitivity to spot uranium prices.

Shaw Group (NYSE:SHAW): While there are differences in the design of the Westinghouse AP1000 reactors (which Shaw uses) and the GE boiling water reactor (which failed in Japan), events in Japan are likely to impact the pace of new nuclear development in the U.S. Any material delay in U.S. approvals would adversely affect Shaw’s ability to ramp up earnings in the second half of 2011 and in 2012, and will be a significant negative for the stock.

Recently, there have been some concerns about AP1000 reactor’s vulnerability to earthquakes. According to Rep. Edward J. Markey (D-Mass.), “One of NRC’s longest-serving staff has warned in NRC documents that the reactor’s containment shield could shatter 'like a glass cup' due to flaws in the design of the shield building if it is hit by an earthquake or a commercial aircraft."

High-tech industrial stocks nuclear exposures: These are likely to see pressure on their stock prices. HLS Systems (NASDAQ:HOLI) and China Valves Technology (OTC:CVVT), with ~20% revenues from the nuclear power sector, are the two names with the most direct exposure to this space. HOLI, which is overvalued at 20x 2011 EPS, can see more downside.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.