Uranium equities and the spot price of the commodity bottomed out in mid-March as the magnitude of the nuclear crisis in Japan was broadcast to the world.
But since then, there's been an interesting divergence between the spot price and uranium equities as a group, with stocks underperforming in the recovery. (See chart below). The uranium spot price rebounded from a low of $49.25 (U.S.) per pound on March 16 to $61.13 on March 24, a gain of 24 per cent. Over roughly the same time frame, a market capitalization-weighted index of equities rose by only 15 per cent - and came under renewed selling pressure in the last week of March.
So what's going on? RBC Dominion Securities Inc. analysts Adam Schatzker and Fraser Phillips believe it's because spot uranium buyers and sellers are different than equity traders - with a much more intimate familiarity with the nuclear industry. "The spot buyers and sellers appear to be much less prone to the emotional swings that affect the general public, including those trading uranium equities," the RBC analysts said.
While the commodity traders remain focused on a physical market with tight supplies, equity players are reacting more to the daily news flow of events out of Japan, which lately has shifted to concerns about the spread of radioactive contamination. "We think that the uranium equities have, in many ways, become a barometer for sentiment of the major news outlets of the world," Mr. Schatzker and Mr. Phillips said.
The takeaway: equities should catch up once events in Japan become more of a distant memory. "We continue to believe that the uranium industry will again find its legs and that the public perception of nuclear power will shift positively," the analysts wrote in a report.
"We think that the uranium equities will perform better toward the end of 2011 into early 2012 as the full scope of the Japanese crisis is better identified and attention is again focused on clean, economic electricity generation."
Upside: Noting that uranium equities are now trading below their estimated net asset value estimates, RBC expects higher prices over the next 12 months for all uranium companies it covers.
Among its favourites are Cameco Corp. , with a price target of $38 (Canadian); Ur-Energy , with a target of $2.75; and Uranium One , with a target of $6.25. All three have "outperform" ratings.
If you're looking for a stock that's a laggard, TD Newcrest suggests taking a closer look at Thomson Reuters Corp. . Its shares have been mostly flat since bottoming this past July. Compare that to the S&P 500, which gained more than 20 per cent over the same period.
"Even if we isolate the appreciation in the Canadian dollar during this period, we can see that TRI shares in U.S. dollars have materially underperformed the financial stocks that comprise its largest customers," said TD analyst Vince Valentini.
Yet, Mr. Valentini sees lots of evidence to suggest the company is poised to improve its balance sheet and wring out more cost savings from the 2007 merger of Thomson and Reuters.
The company recently held an investor day in New York that highlighted improved market conditions and better competitive positioning of the Thomson Markets segment that serves the financial services industry.
Upside: While Mr. Valentini maintained his $52 (Canadian) price target, he said his "bias is more to the upside" following the presentation. He said the "most exciting" thing to come out of the investor day was evidence surrounding the company's platform consolidation that should drive margin expansion to levels higher than anticipated.
"We continue to expect a material ramp-up in earnings per share and free cash flow through 2012 for this company owing to the flow-through of full merger synergies and an acceleration in revenue growth on a highly fixed cost base. This improvement in results should translate into material dividend growth and an improvement in investor sentiment, as we do not expect any large acquisitions over the next 12 to 18 months that could be either dilutive or disruptive," Mr. Valentini said.