4 Recovery Plays in the Tsunami’s Wake

by Ivan Martchev | March 15, 2011 12:17 pm

The Nikkei closed at 8,605 on Tuesday, after two days of hectic trading attempting to price in the economic damage from the tsunami. So far, the destruction looks to be four-to-five times larger than the Kobe disaster, and with several problematic nuclear reactors still in unstable condition, experts now fear overheating and a total meltdown of the nuclear rods.

We all hope that a Chernobyl-type catastrophe can be averted, but the situation is too unstable to predict at the moment. If we end up facing a worst-case scenario, the pressure on nuclear stocks should continue over the short term. The reaction is understandable, but erroneous, because without nuclear power the world’s future energy needs probably cannot be satisfied.

In the next 10 years, there are currently around 108 new reactors expected to be built, with 19 scheduled to be shut down, so the net addition of new reactors is substantial. China is building 42; India and Russia are building 12 each. The emerging world is going ahead with their energy plans regardless of what happens in Tokyo — they have no choice.

And global instability also continues elsewhere in the world. In Libya, even though headlines have died down, the battle there rages on, and opposition leaders are sounding desperate calling for air strikes on Gaddafi. With oil hovering near $100 per barrel, it is easy to dismiss the high price as a result of geopolitical tensions, but my long-term research indicates that we are likely facing much higher energy prices because oil simply will not be enough to satiate the world’s energy demand. This is yet another reason why uranium is here to stay.

The safest stock to bottom-fish with in the nuclear sector is Cameco Corporation (NYSE: CCJ[1]), as the majority of its contracts are done on a long-term basis and the company has very little exposure to the volatility of the cash uranium market. Cameco will be supplying uranium long after the headlines from Japan die down. Other more speculative uranium stocks that I liked previously with more exposure to the cash market like Denison Mines Corp. (AMEX: DNN[2]) are likely to underperform notably in the current environment.

The Nikkei has pretty much crashed, and with the central bank pumping record amounts of money into the economy, stocks will respond sooner or later as reconstruction efforts are likely to raise GDP growth.

It is difficult to call a bottom here as the reactors continue to overheat and explosions rock the nuclear complex, but when the dust settles, Japanese small-cap stocks should do great as they tend to perform better in a rising inflationary environment with accelerating GDP growth — as we are likely to see given what the Bank of Japan is doing. Among the exchange traded funds (ETFs) to consider purchasing on weakness is the SPDR Russell/Nomura Small Cap Japan (NYSE: JSC[3]). This is a buy-and-hold investment to play the eventual economic resurgence driven by a reconstruction boom for the next couple of years.

There are also several closed-end funds that focus on Japan that may make good shopping list candidates. The Japan Smaller Capitalization Fund (NYSE: JOF[4]) tends to trade at substantial discounts to NAV near important market lows (for example, last summer when the Japanese market was under pressure it traded at an 8.6% discount), and tends to close the gap as stock trading normalizes. This week, you may have such an opportunity to pick up JOF shares at a bargain price.

Finally, solar stocks saw notable investor interest on the news of the nuclear disaster as investors believed — and rightfully so — that alternative energies should see more serious consideration. But the solar sector is driven by government subsidies in a time of record deficits in most developed markets. There may be a short-term trade in the Market Vectors Solar Energy ETF (NYSE: KWT[5]), but I would not overstay my welcome past any quick gains over the next month or two. I don’t see where the money for new subsidies will come from, which ultimately will determine the fate of solar stocks.

Endnotes:
  1. CCJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=CCJ
  2. DNN: http://studio-5.financialcontent.com/investplace/quote?Symbol=DNN
  3. JSC: http://studio-5.financialcontent.com/investplace/quote?Symbol=JSC
  4. JOF: http://studio-5.financialcontent.com/investplace/quote?Symbol=JOF
  5. KWT: http://studio-5.financialcontent.com/investplace/quote?Symbol=KWT

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