The Best Energy Trade Of 2017
No, it’s not in oil either, the best energy trade in 2017 will come from a cheap and abundant energy source that has been used effectively in America for decades. See which stock will profit the most in 2017 and how to use options to increase your profits by 720%.
There is no shortage of opinions on what the best energy investments will be for 2017. For instance, you could very easily make an argument that this is going to be the year for a fossil fuels resurgence. On the other hand, there are plenty of reasons to believe renewable energy is going to finally become the go-to source of energy generation in the US.
Yet, those arguments are ignoring what may be the best energy trade in recent memory. The thing is, the future of cheap, abundant energy may actually be nuclear power. More specifically, 2017 could mark the rebirth of the uranium trade.
Here’s the deal…
Uranium was literally the worst performing major commodity in 2016. It lost nearly 50% of its value over the course of the year. In a nutshell, the world was extremely oversupplied with uranium and demand wasn’t expected to catch up anytime soon (despite several new nuclear plants coming online).
With uranium prices at 10-year lows, you could be forgiven for assuming the commodity was dead-in-the-water. However, everything changed this week with eye-opening news from Kazakhstan. The country, formerly part of the USSR, is the world’s largest uranium supplier. Most people only know Kazakhstan as home of the fictional character “Borat”, but the nation actually supplies 40% of the global uranium supply.
So, it was very big news when the country announced it would be cutting uranium production by 10% (or roughly 3% of the world’s supply). Basically, the ultra-low price of uranium resulted in suppliers having to take drastic action to increase the price. Lowering supply by 3% (roughly 2,000 metric tons of uranium) may not seem like it will shift the needle that much. However, it was actually very positive news for many uranium companies who have mostly been operating at or near a loss this past year.
One such company is Cameco (NYSE: CCJ), the world’s largest private uranium producer. Even to the largest producing uranium company, 2,000 tons is a big deal. CCJ only expected to produce about 14,500 metric tons of uranium in 2016, so you can see why the production cut was big news in the industry.
In fact, CCJ’s share price has gone up 15% in just two days since the news came out. Most other uranium producers have done just as well or better.
So is that it? Is there any further upside left in CCJ? Certainly the supply-side is looking better… but what about demand?
Here too, we have significant potential for an increase in 2017. You see, nuclear power may be the one major energy source both conservatives and liberals support. Nuclear plants provide a local, abundant source of energy, and it can be developed by domestic businesses. Plus, nuclear reactors have zero emissions and can be very environmentally friendly. To top it off, the latest reactors are basically accident-proof, so we won’t see a repeat of Fukushima.
In what could be an extremely contentious year in US politics, nuclear power could be one area where most people actually agree. Combined with the supply cut, this could be a huge rebound year for uranium.
Now, to profit from this scenario, you could just buy CCJ stock. At just under $12.50 a share, it’s very cheap. If the share price returns to the 2015 high of just about $17.50, you’re talking about a solid 40% return. Not bad.
However, we can do so much better by trading options.
Because CCJ is a cheap stock, the options are also extremely cheap. For example, we could buy the June 12 calls for just $1.40. Remember, one call equals 100 shares, so a single call would cost you $140. For this amount, you’d have six months for the stock to reach $13.40 ($12 strike price plus $1.40 premium) to break even. The upside is unlimited. So, if CCJ hits $17.50, you’d earn $410 ($17.50 – $13.40 and then multiplied by 100), which is a 293% return!
To put it differently, you could buy 100 shares of CCJ outright for $1,250, sell it at $1,750, and make $500. Or, you could spend $1,400 on a 10-lot of CCJ June 12 calls, sell it at $17.50, and make $4,100!
Let’s say you instead want a full year of coverage from your CCJ calls. The January 2018 12 call would cost you $2.20. For just $80 more per contract than the June 12 call, you’d have a full year for CCJ to reach your exit level. Regardless of your preference, it’s abundantly clear how much more upside potential there is in buying CCJ options than going with the shares outright.
Note: The author of this article is Jay Soloff. Jay’s colleague, Tim Plaehn, is the lead investment research analyst for income and dividend investing at Investors Alley. He is the editor for The Dividend Hunter and 30 Day Dividends.
Category: Energy
