Building The Perfect Portfolio Part I: Bargain Hunting In The Uranium Sector What should I do with my money?

What should I do with my money?

I am often asked the question “what should I do with my money?” and for obvious reasons this is a very difficult question to answer. I typically start by saying that you shouldn’t do anything until you’ve done a massive amount of research and reading. Even if you only do it so that you can be sure you’re not getting poor advice from your IFA (Independent Financial Adviser).

I then tend to just tell people what I’m doing with my own money, with the caveat that I have a pretty big appetite for risk. But let’s suppose I know the person very well, and I know that they get the macroeconomic picture, and that I know they will have the conviction to buy more of something if it were to drop from say $20 to $15. In that case here’s what I might say to them.

Find what’s cheap

Start by looking for asset classes that are unloved and beaten down, and are therefore cheap. Perhaps the most obvious of these right now is the uranium sector.

Prior to the disaster at Japan’s Fukushima nuclear power plant in March 2011, the nuclear industry was enjoying something of a renaissance. Fuelled by growing demand for energy and the need to reduce carbon emissions, nuclear power even began to garner support from environmental campaigners.

However, in the immediate aftermath of the Japanese tragedy several nations shutdown their nuclear facilities and cancelled the construction of new plants, while others delayed construction projects pending a full safety review.

The resulting drop in demand for nuclear fuel triggered a fall in the price of uranium from over $74 per pound at the beginning of February 2011, to around $50 by mid August.

A 10 Year Chart Of The Uranium Spot Price

Uranium Monthly Price 10 year

 

Monthly price chart in U.S. Dollars per pound. Chart courtesy of indexmundi.com.

The price of uranium hasn’t yet recovered and is still languishing at around $50, however the long-term prospects for the nuclear industry have been largely unaffected by the Fukushima incident. Indeed this short-term selloff may well present an excellent opportunity for investors, since the supply of uranium is set to fall considerably next year leaving a significant shortfall.

The fundamental outlook for uranium is compelling and many of the stocks in the sector are on sale at a steep discount.

How to play uranium

I would start by putting some money in the Global X Uranium ETF which is listed on the New York Stock Exchange under the symbol URA. The fund provides investors with a convenient way to gain exposure to the uranium sector without having to pick individual stocks. In total the fund holds 24 companies and charges an annual management fee of 0.69%.

I would also buy a small basket of individual companies including:

Cameco Corporation (TSX:CCO & NYSE:CCJ) – one of the world’s largest producers accounting for about 16% of global uranium production.

Denison Mines (TSX:DML & AMEX:DNN) – an intermediate uranium producer with four producing mines in the U.S. and decent exploration upside potential.

Fission Energy (CVE:FIS) – a junior exploration and development company with properties in the Athabasca Basin, Quebec, and the Macusani District in Peru.

Strathmore Minerals (CVE:STM) – a Canadian based junior exploration and development company with some of the largest in-ground uranium resources in the United States.

I would also consider buying Uranium Participation Corporation (TSE:U) – an investment holding company that provides an excellent proxy for the price of uranium since it invests in, and holds physical uranium.

As always I wouldn’t deploy all my money into the sector at once. I would instead spread out my purchases over the next few months.

In part II of this article I will examine another undervalued sector that represents an excellent buying opportunity.

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