Investing in out of favor industries takes patience, as well as a conviction that the industry in question isn’t out of favor permanently. Some industries never mount a comeback because technology renders them obsolete. A number of people would argue that this is the case with the nuclear power industry. I am not one of those people.

The nuclear power industry grew exponentially from 1970 until 1986, when the Chernobyl accident intervened. The global growth rate of nuclear power slowed substantially in the two decades following Chernobyl. Then, in the aftermath of the 2011 Fukushima Daiichi nuclear disaster in Japan, global nuclear power consumption contracted significantly for the first time.

In the months following the Fukushima accident, uranium miners like Cameco (TSX: CCO, NYSE: CCJ) and Denison Mines (TSX: DML, NYSE: DNN) saw their share prices get cut in half. And in the years since the accident, these companies have failed to recover:


Five-year performance of Cameco and Denison Mines. Source: Yahoo Charts

But there may finally be some light at the end of the tunnel for the beleaguered industry, driven by the developing world. Currently the U.S. is by far the world’s largest nuclear power consumer with 33.4% of the global total. France is second with 17%, and Russia third with 10.4%. But the growth rates for nuclear power in developed countries are projected to be flat in the coming years.

The recently released U.S. Energy Information Administration’s (EIA) Annual Energy Outlook 2015 (AEO2015) forecast that nuclear power in the U.S. would grow slightly over the next 25 years with an overall increase in power consumption, but that the percentage of electricity generation from both coal and nuclear would not: “Generation from coal and nuclear energy remains fairly flat, as high utilization rates at existing units and high capital costs and long lead times for new units mitigate growth in nuclear and coal-fired generation.” (The EIA projects that most of the growth in the power industry will come from natural gas and renewables.)

The outlook for nuclear power appears much brighter in developing countries. In order to meet the future energy needs of their large and growing populations, China and India are faced with limited cost-effective options. Coal-fired power has historically been the cheapest option for these developing countries, but they are under intense international pressure to limit carbon dioxide emissions. Renewables will certainly play an important role in the mix (and China is investing heavily in renewable power), but the developing countries also need firm power on a large scale. The options for this are generally fossil fuels — with their related carbon dioxide emissions — or nuclear power.

In 2013 China’s nuclear power consumption increased by 13.9%, and it has doubled since 2006. China has 26 nuclear power reactors in operation, 23 more under construction, and is projected to see a three-fold increase in nuclear capacity to at least 58 gigawatts (GW) by 2020, then another near tripling to 150 GWe by 2030. India expects to have 14.6 GW of nuclear capacity on line by 2020 and to produce 25% of its electricity from nuclear power by 2050.

Germany and some other developed countries will probably continue to phase out nuclear power, but there are 71 nuclear reactors under construction around the world. The next few years may continue to see slow growth globally as new reactor launches barely stay ahead of decommissioning for the oldest plants, but ultimately nuclear power’s growth in the developing world will cause its global growth rate to accelerate.

Uranium prices have begun to respond, climbing by about 35% since last summer. Nevertheless, the share price of uranium miners has continued to languish. But they slowly began to move up a month ago, and then most surged last week following a ruling in Japan that will allow the Sendai nuclear plant to become the first one to reopen since the Fukushima disaster. Over the past month, CCJ and DNN are both up around 15%.

Investing in this sector may require a bit of patience, as global uranium inventories are still healthy as a result of the post-Fukushima decline. Many countries will continue to carry out plans to phase out nuclear power. But I expect this industry to resume growth as the developing world searches for firm power with a low carbon footprint.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

No End in Sight to Slump at NOV     

Anyone choosing to hold a cyclical stock through a major slump might be better off tuning out news until it starts to improve, barring something material to the longer-term investment thesis. Why pile quarterly servings of psychic pain on top of financial losses based on trends known to be transitory?

With that in mind, National Oilwell Varco (NYSE: NOV) shareholders should feel free to skip to the bolded recommendation at the bottom.

For NOV, the bottom remains more of a process than a point, with the leading rig outfitter’s stock down 5% in the wake of expectedly weak results accompanied by a fairly ugly forecast.

While revenue was off just 1% and earnings per share excluding items down 12% from a year ago, the forecast signaled more weakness to come. Rig Systems bookings in the first quarter were half of what they’d been in the fourth quarter of 2014, and that segment’s operating margin is expected to decline from the most recent 19.3% into the mid-teens by the next reporting period.

In the Wellbore Technologies segment highly dependent on U.S. land drilling, margins plunged from 18.1% in the fourth quarter to 10.6% in the first quarter, and are admittedly headed for “mid-single digits.”

All of which makes NOV’s repurchases of 10% of its shares outstanding since September look like no bargain at the moment, though it should still prove one in the long run.

These have slowed recently, the CEO said, “in view of some potential acquisition candidates coming into sharper focus.”

Like the recent share repurchases financed with debt, acquisitions will chip away at NOV’s balance sheet, while hopefully setting stage for profitable growth once the cycle turns. Based on management commentary, don’t expect that to happen this year.

The news won’t improve for many months at least, and the only compensation is that the business remains dominant and the stock dirt-cheap. NOV remains a Buy below $60 in the Conservative Portfolio.

— Igor Greenwald