Market Overview
Ahead of a big week for the market, the S&P 500, Dow and Nasdaq all rose marginally last week. That being said, while the indexes were modestly higher, there was plenty of daily rotation last week, and there likely will be more of the same this week ahead of the Federal Reserve announcement on Wednesday.
The Stock – Cameco (CCJ)
Why the Strength
Nuclear energy has become a hot topic lately as nations around the world search for carbon-free ways of generating electricity. A U.S. Senate committee just approved a bill that, if passed into law, would fast-track the deployment of a new fleet of advanced nuclear reactors. The favorable vote boosted shares of Cameco—one of the world’s largest uranium miners—on the prospects that its output will help fill the accelerating demand for the energy.
This point was highlighted in Cameco’s Q1 earnings call, in which management indicated “there’s never been a better time to be a pure-play investment in the growing demand for nuclear energy,” especially given the firm’s premier, tier-one assets in Canada. Cameco produced 4.5 million pounds of uranium in Q1—more than doubling the year-ago total—led by a more than three-million-pound production ramp at its McArthur River mine (the world’s largest high-grade uranium deposit). This contributed to revenue of nearly $690 million in the quarter (up 73%) and EPS of 27 cents that beat estimates by 11 cents.
The top brass said that recent legislative decisions in five of the world’s G7 nations in support of the nuclear energy sector will provide a significant tailwind for many years that supports “full-cycle demand growth” for nuclear power and the uranium required to run reactors.
To that end, the company has been growing its pipeline in the last couple of years, including the addition of 80 million pounds worth of long-term uranium contracts (a record). For 2023, Cameco expects over 20 million pounds of production of the metal (nearly double the year-ago total if realized), while analysts see the bottom line soaring this year and next.
Technical Analysis
CCJ actually avoided the worst of the damage during the bear market—shares hit a new high in early April last year, and while the action after that wasn’t great, the stock hit higher lows over the months. And starting in February, shares set up a nice base, and the big-volume move two weeks ago looks like the start of something meaningful. We’re OK buying a little here and adding if CCJ continues higher. Stop — 27
The Covered Call Trade
Buy Cameco (CCJ) Stock at 33, Sell to Open July 32 Strike Calls (exp. 7/21) for $2, or a Net Price of 31 or less
Static Return: $100 per covered call (3.22%)
Breakeven: 31
Covered Call Return (if assigned): $100 per covered call (3.22%)
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 31 or less. (In this case 33 minus 2 = 31. Or another example is you could pay 32.75 for the stock and sell the call for 1.75, which also equals 31)
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 June 21, 2023.
