Oil, Geopolitics, and Cameco: Here's Where the Stock Could Be in 12 Months

The geopolitical conflict in the Middle East has led to high oil prices, which is hardly a surprise. However, the situation highlights the importance of power to the normal functioning of the world economy. And it makes a company like Cameco (CCJ 1.37%), which provides fuel and services to nuclear power plants, look a lot more attractive.

Cameco is in the right place at the right time

Cameco has been a public company for a long time. It suffered through the deep uranium market downturn after the Fukushima nuclear meltdown. And it has survived to see the benefits of today’s nuclear power renaissance, as electricity demand from data centers, artificial intelligence, and electric vehicles has led to a reconsideration of nuclear power as a clean energy source.

Being a reliable nuclear fuel supplier with operations in economically and politically stable regions has paid off handsomely for the company. The stock is trading near its all-time highs and is up more than 200% over the past year. Over the past five years, the stock is higher by more than 600%. If you owned Cameco, you have made out very well.

Cameco’s stock price is lofty

Cameco’s business has changed in recent years, including its recent acquisition of a 50% stake in nuclear power service provider Westinghouse. That should help smooth out financial performance, given that uranium is a highly volatile commodity. Still, uranium prices are rising, which helps explain Cameco’s massive stock price advance.

The problem is that investors appear to have already priced in much of the good news into Cameco’s stock. The company’s price-to-sales ratio is 22x, compared with a five-year average of 9x. The price-to-earnings ratio is a massive 131x (there is no five-year average due to losses in that span). And the price-to-book ratio is 10.9x compared to a five-year average of 3.3x. While electricity and nuclear power are both likely to remain important for years to come, it still looks like investors may have become too enthusiastic about Cameco’s stock price.

Tread with caution if you buy Cameco

Cameco is a well-run business. There appears to be a looming uranium supply shortage. Uranium prices are high, and nuclear power is likely to be a key source of electricity in the future as electricity demand grows.

But paying too much for a good business can turn it into a bad investment. After such a large price advance, even a small amount of bad news could lead to a steep decline in Cameco’s stock price. Given the stock’s lofty valuation, investors should probably be worried that the stock will be lower in 12 months than it is today.