Sometimes it’s best to wait for the dust to settle.

After the earthquake in Japan last March triggered a deep sell-off in all stocks related to nuclear power, a number of investors started to bottom-fish. Any buying turned out to be premature, as key industry stocks fell ever lower to levels not seen in several years.

That bottoming process appears to have ended, and with many shares far from their 52-week highs, these beaten-down names could offer material upside in 2012.

The Global X Uranium ETF (NYSE: URA), launched in November 2010, gives a clear snapshot of how uranium stocks have fared.

 

Why has the ETF made a 25% upward move in just a few weeks? Mostly due to the fact that the spot price for uranium has stopped falling. It was in the mid $60s (per pound) a year ago, fell to about $50 this past fall, and in recent sessions, has moved back up into the low $50s. (As a point of reference, uranium sold for $135 a pound back in 2007.)

#-ad_banner-#Emerging economies: still hungry for nuclear
To be sure, the Japanese nuclear crisis has surely led to a pause for this energy source. Major economies like Japan and Germany intend to wean themselves from nuclear power, while other economies like the United States and France have delayed plans to build new reactors. Yet demand for nuclear power — and for uranium by extension — remains unabated in some of the world’s fastest-growing economies such as China, which is the most aggressive builder of new power plants.

It’s not just China, either. Let’s look at India as an example. Electricity generation in that country has tripled since 1990, but that’s not enough to meet booming demand in this densely populated country. Moreover, oil imports are leading to chronic trade imbalances, a trend that will only worsen as oil prices rise. So India’s leaders have committed to giving nuclear energy 25% of the nation’s power generating capacity, up from 2.5% today.
 
To get there, India’s uranium appetite is forecast to spike tenfold over the next decade. As it stands, operators are already having trouble finding enough fuel to keep plants running. In fact, only six of the country’s 17 reactors are operating anywhere near full capacity.

Supply and demand
There are a couple of other factors to consider that could boost uranium prices. On the demand side, crude oil appears to be staying north of $100 a barrel (a price which Saudi Arabia has noted it now needs to meet ever-higher domestic spending needs.) Some think oil could go to $110, $120 or even higher once the U.S. and Europe rejoin the league of growing economies. Pricey oil has always renewed fresh talk of the need for nuclear power, which entails high upfront construction costs, but low eventual operating costs.

On the supply side, a key agreement with Russia to provide de-militarized uranium is set to expire in 2013. That means uranium miners will need to step up their output simply to meet existing demand. And demand is sure to grow. However, a number of long-standing uranium mines are starting to see declining levels of output, which should help to undergird prices as the supply/demand equation shifts.

Consider these numbers… There are currently 430 nuclear-power plants in operation worldwide. An additional 60 plants are under construction worldwide (roughly twice as many as will be decommissioned in the next five years). Moreover, there are 300 additional plants that are currently being contemplated for construction, according to the International Energy Agency (IEA).

Three ways to play
Investors can profit from the resurgence in uranium in three ways. First, you can invest in some of the smaller uranium producers that carry a high degree of risk if uranium prices ever fell to fresh lows, but have a high degree of operating leverage if uranium prices indeed firm up. Check out mining companies such as Uranium Energy Corp (AMEX: UEC), Uranerz Energy (AMEX: URZ) and Uranium Resources (Nasdaq: URRE).

Other names to consider include USEC (NYSE: USU), a domestic processor of uranium, and GSE Systems (AMEX: GVP) which provides training for the next generation of nuclear engineers.

Second, you could invest in a broad-based fund such as the Global X Uranium ETF or the Market Vectors Uranium & Nuclear Energy ETF (NYSE: ELR). These funds strike a nice balance of exposure between uranium miners and the utilities that use uranium.

Yet in many respects, Cameco (NYSE: CCJ), the industry’s largest uranium miner, holds the greatest appeal. The company has a decade-long supply agreement with China to supply more than 20 million pounds. That long-term contract should lead to fairly smooth revenue streams.

Shares look reasonably priced at around 16 times projected 2012 earnings per share (EPS) of $1.30. But that’s not the way to look at this stock. Instead, shares of Cameco move in lock-step with uranium prices, and the fact that shares are 50% off the 52-week high tells you where sentiment stands right now.

Cameco will report annual results on Feb. 9, which will provide a solid glimpse into the company’s production roadmap and its latest view of industry supply, demand and pricing. Though shares could easily mark time in the near-term if uranium prices don’t rebound further, this is a great long-term play on an industry that will move from over-supply to under-supply.

Risks to Consider: If oil prices pull back sharply, then the case for nuclear power will weaken. Moreover, a glut of natural gas and the resulting price drop has some utilities considering a move to build more gas-fired plants at the expense of other energy sources.

Action to Take –> We’re approaching the one-year anniversary of the earthquake in Japan, which seemingly set the nuclear power industry back a decade or two. In reality, the setback should prove to be much more short-lived. Investors are just starting to warm up to uranium stocks again, though they remain far from their peaks. As uranium prices slowly rebound, especially as we get closer to the eventual drop-off in Russian supply next year, then stock prices for the companies and funds noted above should move up in tandem.

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