March 15, 2022

Today, I’m adding the world’s largest publicly traded uranium company Cameco (CCJ), which has held up spectacularly throughout this market meltdown. Though of note, this stock is volatile and we are going to play it super defensively, with an in-the-money call.

Market Overview

Geopolitical turmoil continues to be the main driver of market action, with inflation concerns not far behind. And with inflation being an issue, not just within the United States but globally, the recent pop in energy prices now has some circles talking about a potential recession throughout Europe and America.

These worries sparked further market declines as the Dow lost 2.0% last week, the S&P 500 declined 2.9% and the tech-heavy Nasdaq fell 3.5%. Year-to-date the Dow, S&P 500 and Nasdaq are lower by 9.3%, 11.8% and 17.9%, respectively.

As I wrote last week, escalating geopolitical fears currently have a stranglehold on the market, and until we see the conflict between Russia and Ukraine end, expect to see volatility continue. But again, let’s not forget: If and when the conflict ends, inflation will still be lurking in the background.

And while it may feel like all the news is bad, and the indexes have fallen to start the year, big picture I’ve been impressed that we haven’t seen a total market meltdown given the onslaught of negative news.

Today, I’m adding the world’s largest publicly traded uranium company Cameco (CCJ), which has held up spectacularly throughout this market meltdown. Though of note, this stock is volatile and we are going to play it super defensively, with an in-the-money call.

New Recommendation

The Stock – Cameco (CCJ)
Why the Strength
Russia’s war with Ukraine has left Europe’s energy sector in limbo as the continent heavily relies on Russian-supplied natural gas for heating and electricity generation. This makes nuclear power generation an attractive prospect, a point noted in an International Energy Agency report on how Europe can reduce its Russian energy imports by increasing production at existing nuclear facilities.

In response to war-related spikes in oil and gas prices, moreover, uranium costs have already exploded 36%, benefiting Cameco—one of the world’s largest miners of the energy metal. Even before the invasion of Ukraine, Cameco turned heads on Wall Street with an good-sized Q4 earnings beat, a 50% dividend hike (though the yield is a token 0.3%) and plans to re-start operations at its McArthur River mine in Canada (the world’s largest high-grade uranium deposit). While sales of $367 million were 16% lower from a year ago, per-share earnings of six cents beat estimates of a penny.

More important is the future, and there the future looks brighter—the company added 70 million pounds of additional long-term contracts to its portfolio in 2021, and management said improving uranium market sentiment is providing the firm with leverage to higher uranium prices under its contracts.

While Cameco operated at 75% below productive capacity in 2021, the company plans to operate just 40% under capacity by 2024 as it ramps up production at McArthur River to an estimated 15 million pounds per year. Cameco also plans to focus on long-term supply contracts going forward, adding some stability to business with an aim to increase profitability while maintaining production discipline.

Analysts predict revenue growth of around 18% percent this year and 23% next, which could prove conservative given the rising demand outlook.

Technical Analysis
After underperforming for more than a decade, CCJ turned a corner in early 2021, riding the 50-day line higher into mid-year and peaking at 22 in June. A quick trip lower to 16 followed, with shares rebounding in August and hitting a higher peak at 28 in November. From there, CCJ nosedived into late January, finding support at 18, but has jaggedly made its way back up to the old high over the last six weeks before today’s drop. Maybe the stock falls apart, but given the massive buying of late, we’re OK taking a small position around here. Stop—21.5

The Covered Call Trade
Buy Cameco (CCJ) Stock at 24.40, Sell to Open April 22 Strike Calls (exp. 4/14) for $3.20 or a Net Price of 21.20 or less

Static Return: $80 per covered call (3.77%)

Breakeven: 21.20

Covered Call Return (if assigned): $80 per covered call (3.77%)

Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.

However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 21.20 or less. (In this case 24.40 minus 3.20 = 21.20. Or another example is you could pay 25 for the stock and sell the 22 call for 3.80, which also equals 21.20.)

For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …

Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.

The next Cabot Profit Booster issue will be published on March 22, 2022.