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  • After a recent drop, stocks are challenging support levels.
  • Growing interest in nuclear energy fuels profits at this uranium company.
  • Lawsuits make this company too risky to buy.

The markets are correcting, and today, major indexes, including the S&P 500 and the NASDAQ 100, converged with 50-day moving averages, a critical level of support. Given that the S&P 500 has been down nearly 8% since mid-month, many stocks are down multiples of that figure, and indexes are testing support levels, you might want to take a swing and add another stock to your portfolio on sale.

While hunting for beaten-down former leaders may be tempting, past bull market winners aren’t usually the big winners in the next bull market move. Instead of wrestling with overhead resistance because of trapped sellers eager to sell rallies to “get out even” in former high-flyers, focusing on stocks demonstrating recent relative strength is a better bet.

A stock to buy

There’s little doubt that this will be a brutal winter for consumers, especially in Europe. The ongoing War in Ukraine is jeopardizing natural gas supplies, particularly in Germany, and as a result, countries are rethinking decisions to shutter nuclear power plants.

Delaying planned shutdowns and restarting moth-balled reactors could be a win-win for politicians eager to show a commitment to energy independence while also battling greenhouse gases. In addition, given Russian supply uncertainty, consumers may need nuclear energy to keep heating and cooling bills in check.

Despite risks associated with nuclear energy, including disposing of spent rods, interest is rebounding, putting bids beneath nuclear energy stocks, including uranium suppliers.

In “This Uranium Miner's Charts Are Glowing,” Real Money technical expert Bruce Kamich writes, “Media coverage of and investor interest in uranium has been increasing with the energy crisis unfolding in Europe and elsewhere, so it may not be a surprise that the charts of uranium miner Cameco Corp.  (CCJ)  are bullish.”

Kamich’s technical analysis of Cameco includes a review of price action, on-balance volume, and moving average convergence/divergence.

OBV is essentially a running total of up-day minus down-day volume. It’s bullish or bearish when the trend rises or falls, respectively.

MACD subtracts the 26-day Exponential Moving Average (EMA) from the 12-day EMA. When that result crosses over or below zero, or a signal line like the 9-day EMA, it’s bullish or bearish.

Back to Kamich:

“In this daily bar chart of CCJ, below, we can see that prices have been making higher lows the past 12 months. Prices are currently trading above the rising 50-day and the rising 200-day moving average lines. Trading volume has been active the past year. The daily On-Balance-Volume (OBV) shows fresh strength from early May and supports further price gains. The trend-following Moving Average Convergence Divergence (MACD) oscillator is in a bullish alignment above the zero line.”

CHART_Street-Smarts_083022

The weekly chart looks attractive, too. Kamich writes, “The weekly OBV line is supportive, and the MACD oscillator just crossed above the zero line for a fresh outright buy signal.”

Solid financials back up the bullishness. In Q2, revenue and earnings per share climbed 55% and 280% year-over-year, respectively. According to Yahoo!Finance, analysts expect EPS of $0.27 this year, up from $0.23 90-days ago. Next year, the average estimate is for earnings of $0.79 per share, up 193% from 2022.

In Cameco’s latest earnings call, CEO Timothy Gitzel said, “we are seeing governments and companies turn to nuclear with an appetite that I’m not sure I have ever seen in my four decades in this business. Therefore, it is easy to conclude that the demand outlook is durable and very bright. But supply is quite a different picture.”

The demand portion of his remark is a bold statement given the length of his experience. The supply comment hints at how supply has fallen, creating a potential gap between rebounding demand and inventory available for sale. 

Cameco’s past decisions to limit production rather than chase prices lower puts it in an enviable position. Currently, it’s working to restart production at McArthur River, the world’s largest uranium mine. By 2024, it expects annual production there to be 10.5 million pounds. For perspective, it sold 24.3 million pounds of uranium in 2021, and overall it's sitting on 464 million pounds of proven/probable uranium reserves.

Given Cameco pegs the long-term uranium price at $51.50/lb exiting July, up from $33.50 last year, there may be compelling opportunities to contract future production growth at profit-friendly rates.

A stock to avoid

What happens when you produce a product that fails to do what it’s supposed to? And, what happens when those customers are military service members who wind up with permanent hearing loss? You wind up with lots of lawsuits with jury-friendly plaintiffs.

3M is on the hot seat for selling earplugs to the U.S. military that were defective, and settling suits brought by hundreds of thousands of former military members are likely to eclipse far the profit pocketed from manufacturing them for less than $1 and selling them to the Government for $7.63.

The company hoped it could insulate itself from claims by offloading the liability to a subsidiary and declaring it bankrupt. However, that plan was dealt a blow when a U.S. Bankruptcy judge ruled against 3M's strategy on August 27, causing shares to tumble.

In “3M Seems Glued to the Lows,” Kamich doesn’t like what he sees in the company's charts.

He writes, “In this weekly Japanese candlestick chart of MMM, below, it is hard to miss the two large red (bearish) candles in recent weeks. The price action below $130 does not look strong enough, in my opinion, to prevent new lows in the weeks ahead. The slope of the 40-week moving average line is negative, and the rally in July/August stopped short of it. The weekly OBV line is leading the way down and has already made a new low and is foreshadowing new price lows in the weeks ahead. The MACD oscillator is below the zero-line and narrowing -- not a good sign.”

CHART_Street-Smarts_2_083022

How low could 3M fall? Kamich says the charts suggest new lows, dropping to $100 to $120.

The Smart Play

Stubbornly high oil and natural gas prices and global energy supply uncertainty certainly provide an intriguing tailwind for Cameco, especially since it has a lot of production it can bring online. 

Suppose utility operators want to lock in a stable source of uranium supply outside Russia. In that case, it could mean longer-term contracts at higher prices, causing free cash flow, profit, and shareholder-friendly dividends to increase. Cameco already bumped its dividend up 50% this year because of its strong performance.

It also doesn’t hurt that Cameco's balance sheet is solid. With a current ratio of six, there’s little risk it won’t make good on short-term liabilities if debtors come knocking.

3M is a different story. I suppose you could argue it's cheap given it's trading at 13 times earnings, near its 5-year P/E low of 12. There’s also the chance an appeal puts its bankruptcy plan back on the table.

However, that’s a lot of risk for an uncertain reward. 3M could find itself on the hook for billions of dollars in settlements, so it won’t surprise me if this stock remains a “sell on strength” candidate until there’s more clarity on settlement figures. Once there's insight, it could be an attractive buy. But there's no telling when that happens. For this reason, buying it could be as risky as trying to catch a falling knife.

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