The Answer to Chinese Pollution and Energy Shortage Problems

By: InvestmentContrarian

Sasha Cekerevac writes: When it comes to making contrarian investments, going against market sentiment might be difficult at first. But the key is to focus on long-term fundamentals with the thesis that corporate earnings will move substantially higher as long as fundamentals strengthen.

One sector that has had quite a bit of negative market sentiment for the past couple of years has been uranium and nuclear power. Following the Fukushima disaster in Japan, nuclear power was put on halt for many nations around the world.

This negative market sentiment was reflected in lower uranium prices and significant hits to corporate earnings for companies in this sector.

However, recent information shows that nuclear power is once again gaining favor, and market sentiment could begin to shift earlier than many people believe, with corporate earnings benefiting from higher demand.

China is by far the leader in construction of nuclear power plants. In 2010, Chinese nuclear power plants had 10 gigawatts of capacity; it is now estimated that officials want this capacity increased to 130–140 gigawatts by 2030. (Source: The Economist, January 19, 2013, last accessed February 28, 2013.)

Following the Japanese disaster, China halted further nuclear construction. However, in October 2012, the Chinese State Council once again approved a number of projects. With over 25 nuclear reactors under construction, China’s nuclear power program is by far the largest in development by any nation.

Corporate earnings in the nuclear power sector have suffered due to the negative market sentiment following the Japanese disaster. The loss of life was truly tragic.

The current Chinese administration realizes that with the massive amount of pollution occurring in metropolitan areas, along with a huge growth for energy demand over the next several decades, nuclear energy is the only real viable solution to produce a lot of power with no air pollution or greenhouse emissions.

While some might continue to view nuclear energy through a negative market sentiment, over the next decade, companies that fulfill the demand for greenhouse emission– and pollution-free power should see higher corporate earnings.

One company to keep an eye on is Cameco Corporation (NYSE/CCJ;TSX/CCO). This firm is the second-largest uranium producer in the world. Even following the negative market sentiment in the uranium sector, Cameco has been able to continue generating corporate earnings.

Chart courtesy of www.StockCharts.com

This three-year weekly chart shows how badly the stock was hurt by the negative market sentiment resulting from the Japanese disaster. While the stock has had a strong move over the past few months, there is clearly substantial room to the upside if uranium demand increases prices—which will translate into higher corporate earnings for the company.

Market sentiment is a difficult concept to peg, and it’s not easily quantifiable. What we do know is that production of new nuclear plants is ongoing, and it will continue at a strong pace for many years. With a limited supply of uranium, this ought to provide strong prices for mining companies, such as Cameco, resulting in higher corporate earnings.

While market sentiment might continue to be negative on nuclear power from a moral point of view, that is an entirely different matter. However, when focusing purely on corporate earnings, it is clear that demand will continue to rise over the next decade.

Source:http://www.investmentcontrarians.com/stock-m...

By Sasha Cekerevac, BA
www.investmentcontrarians.com

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

About Author: Sasha Cekerevac, BA Economics with Finance specialization, is a Senior Editor at Lombardi Financial. He worked for CIBC World Markets for several years before moving to a top hedge fund, with assets under management of over $1.0 billion. He has comprehensive knowledge of institutional money flow; how the big funds analyze and execute their trades in the market. With a thorough understanding of both fundamental and technical subjects, Sasha offers a roadmap into how the markets really function and what to look for as an investor. His newsletters provide an experienced perspective on what the big funds are planning and how you can profit from it. He is the editor of several of Lombardi’s popular financial newsletters, including Payload Stocks and Pump & Dump Alert. See Sasha Cekerevac Article Archives

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