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Thursday, September 19, 2013 - 13:00

This Controversial Energy Sector Is Primed For A Comeback

Thursday, September 19, 2013 - 1:00pm

Energy is vital for every nation in the world -- yet no other sector gets as much bad press.

According to 2011 statistics from BP (NYSE: BP), oil is the predominant source of energy production around the world, followed by coal, natural gas, renewables and nuclear. The energy sector is seeing a revival being led in part by deepwater drillers and shale oil -- despite the Deepwater Horizon disaster in 2010.

In the months after that spill, energy stocks, particularly oil, took a hit: The Energy Select Sector SPDR ETF (NYSE: XLE) fell 20% between April and July. However, if you had bought in during that time of crisis, you would've seen gains of nearly 63% in less than a year when the stock topped $80 the following April.

I've found a similar situation developing right now in another energy market that's been overlooked for years: nuclear power. Specifically, uranium.

After the 2011 disaster at Japan's Fukushima nuclear power plant, uranium prices fell from more than $70 a pound to $50 in the span of just a couple months. The entire sector has been shunned, and ore prices have continued to sink, to a current level near $34 a pound.

Uranium is due for a comeback, thanks to the most basic tenet of economic theory -- supply and demand. Nuclear energy isn't in decline -- it's very much a growth industry. About 13.5% of the world's energy is produced through nuclear power, with 435 plants currently in operation. Construction is underway on more than 60 new reactors in 13 countries, with 160 more planned.

The U.S. gets a lot of low-enriched uranium from Cold War-era Soviet missiles. This supply line is set to end at the end of this year, which will remove 24 million pounds of uranium from the market.

To put that into perspective, about 175 million pounds are used each year worldwide in nuclear power generation. Mining companies provide only about 135 million pounds. That 40 million-pound deficit is about to grow by 60%, which will almost certainly cause prices to rise.

The best way to take advantage of this opportunity is through the Global X Uranium ETF (NYSE: URA). This exchange-traded fund (ETF) holds a number of uranium miners, including Cameco (NYSE: CCJ), Paladin Energy (NYSE: PDN) and Uranium Energy Corporation (NYSE: UEC).

Individually, these miners have exceptional risk due to their limited sizes and low ore prices, making a broad-based ETF a better option. In addition, consolidation may soon come into play, much like the solar industry is experiencing now. URA is down about 20% this year, but I see that as a buying opportunity while the uranium sector is still flying under the radar.

Risks to consider: Building a nuclear power plant is a capital-intensive endeavor that can take many years to complete. Delays due to cash flow problems could result in a slower uranium price recovery.

Action to Take --> Uranium prices are at their lowest point since 2006, but all indications point to a supply-driven rally into next year. The Global X Uranium ETF is currently trading near $15, which looks like a good entry point considering that its relative strength (RS) indicator of 30 is on the cusp of a classic oversold signal.

P.S. Want to know the best way to profit from uranium? StreetAuthority's Andy Obermueller has discovered a company with a chance of ramping up production fast enough to satisfy the coming wave of demand. This firm produced almost 20% of the world's uranium mined last year -- and it's sitting on 65% of the world's supply. To learn why it could be the "surprise investment of next year," click here.

Daniel Cross does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.