Reddit’s r/WallStreetBets crowd has created traction in uranium stocks, with Cameco Corporation (NYSE:CCJ) being the primary topic of discussion. Cameco is one of the biggest uranium producers in the world and makes up 22.49% of the largest uranium exchange-traded fund (ETF), Global X Uranium ETF (NYSEARCA:URA). CCJ stock has rallied considerably since the start of 2021.
While many pure-play commodity stocks have performed well lately due to rising commodity prices, Cameco’s success has another dimension. CCJ stock is a long-term buy as a nuclear power play while low-carbon energy is being emphasized by almost every central authority around the globe.
I don’t think the stock’s upside has reached its peak yet. If you’re a long-term investor, Cameco could present you with some serious gains. Here’s why.
Nuclear Power Is Gaining Popularity
Uranium-235, also known as U-235, is used for nuclear fuel. This relatively scarce element is made of atoms that are easily split, making it the best choice for nuclear power plants.
Although countries such as the United States and Germany have opted not to use nuclear energy as a source of power, China disagrees. It has 49 active nuclear power plants and 17 more in construction, plus 100 additional pipeline projects with a deadline of 2035.
As mentioned before, Cameco mines a considerable amount of the world’s uranium, giving it superior pricing power compared to its competitors. This will, in turn, grant the company a strong foothold in the supply of Chinese nuclear power plants.
The common belief from nations that oppose nuclear power as a renewable energy source is that it’s both dangerous and expensive. These beliefs are, however, stale and lack evidence.
According to Barclays, nuclear power is needed for a country to reach net-zero emissions. Additionally, the dangers of earlier nuclear technology have been lessened by new reactors. They use gravity, convection and heat to protect the reactor core in the event of an accident, an upgrade from power-dependent safety systems.
How Cameco Can Benefit From Nuclear Energy
Barclays also suggests that nuclear energy is a better option than other renewable sources. It isn’t subject to seasonality, it doesn’t require sizable storage units and it produces less waste than other renewables like solar power.
Regarding the price tag of nuclear energy, a study determined that its running costs are significantly cheaper than other energy sources. The cost outlay is the expensive part, but the relevance of that will erode if your power plant has a long enough time horizon.
So why does this all matter to Cameco?
Approximately 10% of the world’s energy is derived from nuclear power. As one of the largest uranium providers in the world, Cameco is a dominant firm in the industry.
As demand for uranium grows through nuclear expansion, the constant annual growth rates of Cameco’s earnings are likely to increase linearly and boost CCJ stock.
CCJ Stock’s Pricing and Valuation
The street’s assumption that Cameco is risky is somewhat surprising. The stock trades at a beta of 1.03, which means that it holds 1.03 times the risk of the S&P 500.
Source: Gurufocus
Also, if we look at the linear downward trajectory of the weighted average cost of capital (WACC), it’s clear that investors and creditors have reduced their demanded risk premiums. To put risk-return utility into perspective, Cameco’s WACC of 5.6% is lower than Facebook’s (NASDAQ:FB) WACC of more than 9%.
From a valuation vantage point, the standout factor is CCJ stock’s 65% expected three-to-five-year earnings per share compound annual growth rate (CAGR).
Furthermore, CCJ stock’s working capital growth of 15.23% is 244.4% more than its five-year average. That means the company can facilitate growth acquisitions with cash rather than issue new shares and subsequently dilute shareholders.
All of these pricing and valuation factors ensure the prospects for Cameco remain solid. CCJ stock could reach significant heights based on these metrics alone.
CCJ Stock Has Momentum
The Reddit chatter and surging uranium prices have sent Cameco’s stock price soaring. CCJ stock is up by more than 29% for the past month. Its relative strength index (RSI) increased by approximately 2.5 times earlier in September.
There’s no doubt you would’ve been better off entering into a position earlier. But I don’t see long-term momentum slowing down any time soon due to the systemic drive behind uranium as well as Cameco’s market position. CCJ stock is a worthwhile bet.
On the date of publication, Steve Booyens held a long position in CCJ. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa, and his articles are published on various reputable web pages such as Seeking Alpha, Benzinga, Gurufocus, and Yahoo Finance. Steve’s content for InvestorPlace includes stock recommendations, with occasional articles on crowdfunding, cryptocurrency, and ESG.
