Headquartered in Canada, Cameco Corporation (CCJ) is the world’s largest publicly traded uranium manufacturer and supplier. The company has a licensed capacity to produce 53 million pounds of uranium annually because its operations are backed by 455 million pounds of proven and probable mineral reserves.

As a critical element in carbon-free nuclear energy production, yellow cake plays a vital role in clean energy production. With major economies investing heavily to increase renewable energy production in lieu of fossil fuels, CCJ is poised to emerge as a major supplier of uranium globally.

However, recently, uranium prices reached six-year highs, bolstered by Sprott Physical Uranium Trust’s immense buying spree. This, coupled with increased retail investor interest in the commodity, fueled by Reddit group r/UraniumSqueeze, has driven CCJ to a 123.6% price gain over the past year and 82.5% year-to-date.

While CCJ is well-positioned to move higher because of the Reddit-triggered short uranium squeeze, the company’s relatively low profit margins and bleak growth prospects indicate that the momentum might be short-lived.

Here’s what we think could shape CCJ’s performance in the near term:

Increasing Uranium Prices

Canadian company Sprott Asset in July launched commodity-based fund Sprott Physical Uranium Trust. Sprott has bought more than 24 million pounds of uranium through this fund, which is equivalent to approximately 14% of global yellow cake consumption. Last month, the fund launched an at-the-market equity program to raise $300 million to continue its uranium buying spree. And on September 10, the fund released a statement regarding the expansion of its at-the-market equity program by $1 billion, the proceeds of which are expected to be used to purchase uranium.

Also, retail investors have been actively trying to instigate a “Gamestop-like squeeze” in the commodity markets by acquiring mass volumes of uranium. Regarding this, Morgan Stanley analysts Marius van Straaten and Susan Bates said, “It is not a secret that investors’ newfound interest in uranium, predominantly through Sprott’s physical uranium trust, is the driving force behind its resurgence.”

According to a Bloomberg article, Horizons ETFs portfolio manager Nick Picquard expects uranium prices to rise 41.2% from $42.50 to hit $60 soon.

Stretched Valuation

In terms of forward EV/EBITDA, CCJ is currently trading at 229.73x, which is 2,886.1% higher than the 7.69x industry average. In addition, the stock’s 61.02 forward Price/Cash Flow ratio  is 1086.7% higher than the 5.14 industry average.

Also, CCJ’s 8.53 and 8.42  respective forward Price/Sales and EV/Sales multiples are significantly higher than the 1.27 and 2.43 industry averages.

Consensus Rating and Price Target Reflect Potential Downside

Of the eight Wall Street analysts that rated CCJ, five rated it Buy, and three rated it Hold. The $22.71, 12-month median price target indicates a 7.2% potential downside from yesterday’s $24.46 closing price. The price targets range from a low of $19.76 to a high of $30.04.

POWR Ratings Reflect Uncertainty

CCJ has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

CCJ has a D grade for Value. This is justified, given its higher-than-industry valuation ratios. However, it has an A grade for Momentum. CCJ is currently trading above its 50-day and 200-day moving averages of $18.15 and $18.22, respectively, in sync with the Momentum grade.

The stock has a grade of C for Quality. CCJ’s 31.47% trailing-12-month gross profit margin  is 22.9% lower than the 40.81% industry average, in sync with its  Quality grade.

Of the 39 stocks in the D-rated Industrial – Metals group, CCJ is ranked #25.

Beyond what we’ve stated above, we have rated CCJ for Growth, Sentiment, and Stability. Get all CCJ ratings here.

Bottom Line

CCJ’s momentum can be attributed to the increased retail investor interest in uranium stocks. Commodity’s prices are currently near their six-year highs. However, the company’s financials paint a different picture. Despite being the world’s largest publicly traded uranium company, CCJ’s profit margins are much lower than its peers’. Moreover, analysts expect the company’s revenues and EPS to decline 19.5% and 30.7%, respectively, year-over-year in its fiscal year 2021. Thus, we think investors should wait until CCJ’s fundamentals improve before investing in the stock.

How Does Cameco Corporation (CCJ) Stack Up Against its Peers?

While CCJ has an overall C Rating, one might want to consider looking at its industry peers, Ryerson Holding Corporation (RYI), Atkore International Group Inc. (ATKR), and Norsk Hydro ASA (NHYDY), which each has  an overall A (Strong Buy) Rating.

Note that ATKR is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Growth portfolio. Learn more here.

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