Not long ago, solar stocks were left for dead and shorted into the ground. There were plenty of reasons to be negative on the solar sector especially since a major pullback in government subsidies in regions like Europe created excessive inventories and manufacturing capacity. A glut of supplies, and heavy debt loads led to major losses for many solar companies. It seemed as if the situation was hopeless and many investors simply gave up and sold solar stocks at multi-year lows just a few months ago. However, in hindsight, this was a huge buying opportunity and investors who bought these stocks before signs of hope returned to the sector, reaped enormous profits. Some of these stocks were trading for just a buck or two and went on to trade for many multiples higher. After a huge run, it might be time to take some profits in the solar sector because the "easy money" has probably been made. Furthermore, there are other sectors such as nuclear energy stocks that could be poised for a significant rally in the coming weeks and months. First, let's take a look at some well known solar companies like Trina Solar (TSL), First Solar (FSLR), Yingli Green Energy (YGE):
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Trina Solar shares have a 52-week range of $2.27 to $17.84. This company has been posting losses and even though it appears to be poised for only a very small profit in 2014, that has not stopped the stock from rocketing higher. Analysts expect the company to lose $1.24 per share in 2013, and post profits of 34 cents per share in 2014. On the balance sheet, Trina Solar has about $448 million in cash and around $1.1 billion in debt. As the chart above shows, this stock has roughly tripled in value in the past few months. Any investor who was smart or lucky enough to buy near the 52-week low of just over $2, could have made even bigger gains of around 700% in just a year.
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First Solar shares have a 52-week range of $24.41 to $65.99. This U.S.-based company has been reporting profits and it is an industry leader. Analysts expect the company to earn $4.40 per share in 2013 and post profits of $3.40 per share in 2014. First Solar has one of the strongest balance sheets with about $1.53 billion in cash and only around $230 million in debt. As the chart above shows, this stock has nearly doubled from the lows it hit in September.
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Yingli Energy shares have a 52-week range of $1.25 to $8.77. This company has been posting losses and that is expected to continue in 2014. Analysts expect Yingli Energy to lose $1.37 per share in 2013 and post losses of 31 cents per share in 2014. This company has a debt load that could present downside risks for investors, especially if the industry sees another downturn and if it continues to lose money. It has about $432 million in cash and around $2.5 billion in debt. That is a considerable debt load and given the continued losses and huge jump in the stock price, it might be an ideal time to take gains now and reinvest elsewhere.
I wanted to write about the solar sector because it has had such a huge run and now it might be time to take profits. Stocks often fall below fair value when investors are pessimistic, but also tend to rise too much when optimism sets in and momentum investors jump on board. This appears to be the case for the solar stocks, especially since some companies still carry heavy debt loads and are expected to post limited, if any profits. I am also bringing up the solar sector because it is a great lesson in how investor psychology can impact stock prices and create huge buying opportunities. It is very hard to buy into a sector that is out of favor, but it can also be tremendously rewarding as the solar stocks have shown investors.
This brings up another energy sector that has also been out of favor for years due to the nuclear crisis in Japan, (and other reasons). The nuclear or uranium stocks have had it tough, but the future outlook seems much brighter than the past and there are new signs that this sector is about to come back to life. A lot of money has been made in the stock market rally and many smart investors are seeking to take gains in stocks that have experienced large gains and reinvest that into areas that remain deeply undervalued. A potential "sector rotation" is just one reason why uranium and nuclear energy stocks could be poised for a solar-like stock rally. The solar sector has shown how far stocks can run when money inflows flood into a beaten-down industry. Due to increased demand and reduced supplies, some analysts believe uranium prices will rise significantly from about $40 per pound to around $85 in 2014, which could create major upside in this sector. Let's take a look at a couple of charts and uranium stocks which indicate that this sector appears to be "simmering" now and possibly poised for a much larger "break-out" rally:
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Cameco Corp., (CCJ) is a leading uranium producer. As the chart above shows, this stock seems to be starting to "break-out". Cameco shares bottomed out in October at around $17.50 and have now advanced above the 50-day moving average of $18.70 and even the 200-day moving average of $19.92. In fact, this stock is not far from taking out the 52-week high of $22.87. This company has been profitable and analysts expect it to earn about $1.10 per share in 2014. Cameco has a strong balance sheet with about $278 million in cash and around $1.41 billion in debt. Cameco even pays a dividend of 39 cents per share, which yields about 2%. With a market capitalization of roughly $8 billion, profitability, and world-class uranium deposits, this company appears to be the "First Solar" of the uranium industry. As such, it could have less potential downside risks as well as less upside. Investors who want to play a potential rebound in the uranium stocks with more limited risks should consider Cameco or even the more broadly diversified "Global X Uranium" (URA), which is an exchange traded fund that invests in companies like Cameco (which is about 23% of the holdings), and many other stocks in this sector.
UR-Energy Inc. (URG) is a uranium company based in Colorado. It has interests in a number of projects in the U.S. and in Canada. Its main project is called "Lost Creek" and it has landholdings comprised of about 98,000 acres in the U.S. and around 140,000 acres in Canada. This stock has recently started to show some signs of life and it now trades above the 200-day moving average of $1.02 and the 50-day moving average at $1.09. There are a number of reasons why this stock could be ready for much higher prices going forward.
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As the chart above shows, this stock is in a very bullish uptrend. It has been inching higher for the past several months and it appears to be within striking distance of the 52-week high, which is $1.39. If this stock does continue moving higher, it won't take long for it to make new 52-week highs. Even though the chart looks great, the fundamentals are also a reason to consider buying this stock.
After years of development, this company is now producing uranium and that is a new major upside catalyst. This also greatly reduces risks for investors as the company can now generate meaningful revenues and profits. Analysts estimate that the company will generate about $11 million in revenues in 2013, and lose about 13 cents per share. However, with production underway, analysts expect revenues to jump to just over $52 million and for the company to earn as much as 19 cents per share in 2014. Operations at Lost creek only began in August, 2013, and the company expects to deliver product in the fourth quarter. The latest presentation from the company states it achieved its target production rate within the first two months of operation and that the daily recovery is exceeding 2,200 pounds, with an annualized rate of 800,000 pounds. The company is also expecting to close (in Q4 of 2013) on a deal to acquire additional uranium assets in the area which will lead to more production at the Lost Creek Processing facility and higher revenues in the coming months.
UR-Energy recently announced an increased mineral resource estimate for the Lost Creek project. The Lost Creek processing facility has a two million pounds per year capacity and about one million pounds is planned to be processed annually from the mining areas at Lost Creek. With smaller development-stage companies, investors can face potential downside risks due to lack of revenues and lack of financial strength. While these risks were potential issues in the past, these concerns are now fading fast as this company has turned the corner thanks to the recent move into production. It also has closed on a $34 million Wyoming Industrial Development Revenue Bond which has added financial strength and flexibility and this further reduces risks for investors.
When you see a nuclear energy stock like UR-Energy trading for just over $1 and on the verge of profitability, while also showing a potential technical "break-out" and major revenue growth due to production, it appears to be a very compelling buy. This especially seems to hold true when considering how many solar energy stocks went from trading at a buck or two and went on to trade for several dollars or more per share, in just a few months.
Many shorts have bet against the uranium industry for the past few years, but shorts have started to cover their positions in stocks like UR-Energy possibly due to the fact that with production and revenue growth, this stock is potentially too risky to short (especially at these levels). According to Shortsqueeze.com, about 4.3 million shares are currently short and with average trading volume of about 358,000 shares per day, the current short position is equivalent to about 12 days worth of trading volume. That is enough to put this stock in a position for a short-covering rally. Shorts also seem to be seeing the potential upside (for longs) as the current short position is down from about 4.7 million shares in the prior period. That is a decline of about 400,000 shares and if this trend continues, it could help keep additional buying pressure on the stock sending it higher.
On November 5, 2013, this stock traded for $1.27 which is only 12 cents shy of the 52-week high of $1.39 which was made on July 29, 2013. This shows that UR-Energy shares are clearly within striking distance of taking out the 52-week high and potentially making the new highs stock list. In turn, this could bring in another round of short covering as well as momentum investors who watch 52-week high lists in order to find stocks that are on the upswing and in "break-out" mode. Recently, an analyst at Raymond James described Cameco and UR-Energy as some of their "top picks" and set a price target of $1.80 for UR-Energy. That would give investors upside of roughly 70% from current levels. However, if momentum investors come into the uranium sector and shorts are squeezed, that price target could be way too low. (Many solar stocks have recently gone way above most analyst price targets.) Downside risks have faded with the company now producing uranium and revenues and with what seems to be renewed interest in the nuclear energy sector, this stock could be an ideal way to play the upside.
Disclaimer: Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I am long CCJ, URG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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