Recommendation No. 1: Cameco (NYSE: CCJ)

“Sell to Open” Cameco June $24 Call

Option Symbol: CCJ120616C24

Limit Order Price: $1.00 or more

Directional View for Underlying Stock: Neutral

Personal Finance Portfolio: Growth

• Income generated: $100 per options contract (representing 100 shares of stock)
• 86-day rate of return at current stock price of $22.99: 4.3 percent (18.5 percent annualized)
• Tell your broker:

“I want to sell a covered call against 100 shares of my Cameco (CCJ) stock. Specifically, I want to ‘sell to open’ one June $24 call for a credit of $1.00 per share or more.”

• Remember: You should only sell one call option per 100 shares of stock purchased. The trade can only be done in 100-share increments (100, 200, 300, 400, 500, etc.).

Alternative Trade for Those Who Don’t Already Own Cameco:

Buy/Write on Cameco (NYSE: CCJ): Buy the Stock and Simultaneously “Sell to Open” the June $24 Call

Option Symbol: CCJ120616C24

Limit Order Price: $21.99 or less (stock is at $22.99 and June $24 call is at $1.00)

Directional View for Underlying Stock: Neutral

Personal Finance Portfolio: Growth

• Net cost of buy/write: $2,199 per 100 shares
• 86-day return if stock does not move: 4.3 percent (18.5 percent annualized)
• Brokers vary as to whether they call this trade a “buy/write” or a “covered stock” trade.
• Do the trade simultaneously at a single limit price, if possible. For example, if you wanted to buy 100 shares of stock, tell your broker:

“I want to do a buy/write trade. Specifically, I want to buy 100 shares of Cameco (CCJ) and ‘sell to open’ one June $24 call for a net debit of $21.99 per share or less.”

• Some brokers require that you buy the stock and sell the call in separate trades. If your broker is one of these, always buy the stock first and sell the call against it second:

Trade No. 1:

“I want to buy 100 shares of Cameco (CCJ) for $22.99 per share or less.”

Trade No. 2: “I want to sell a covered call against 100 shares of my Cameco (CCJ) stock. Specifically, I want to ‘sell to open’ one June $24 call for a credit of $1.00 per share or more.”

• Ex-Dividend Date: The stock’s next quarterly ex-dividend date is March 28th. Since this ex-dividend date is almost three months prior to June options expiration, the time value associated with the June $24 call is very likely to be larger than the $0.10 quarterly dividend and there is virtually no chance of early exercise to capture the dividend.
• Why the June $24 Strike?: According to Personal Finance editor Elliott Gue, the world’s largest uranium producer is the Growth Portfolio’s “best value play,” so I wanted to give Cameco’s stock price a little extra leeway to rise. Consequently, I did not choose the first call strike price above Cameco’s current stock price of $22.99 (i.e., $23) but the second strike price above (i.e., $24). At the same time, however, I don’t foresee Cameco rising much above $24 in the next three months because of continued fallout over Japan’s March 2011 nuclear accident.

Price Adjustments Regarding This Trade

Stock prices are currently fluctuating and option prices fluctuate with them. Consequently, the limit prices recommended in this trade alert may no longer be immediately fillable by the time the alert has been published. The alerts are valid for seven trading days, so please be patient and place your limit orders as “good ‘til cancelled” for seven trading days.

Investment Rationale for Underlying Stock:

Worldwide, nuclear reactors supply 16 percent of total global electricity demand. To meet existing demand for uranium and growth in the global reactor fleet, mined production will need to increase substantially. Uranium producers like Cameco are a solid bet on the nuclear renaissance.

Cameco, the 800-pound gorilla of the uranium market, currently accounts for roughly one-fifth of total global uranium production. The company aims to double its annual uranium output from 22.4 million pounds in 2011 to about 40 million pounds by 2018. The company is on track to meet that goal as it expands production at existing mines and brings new mines into production.

Cameco’s largest mine is the extraordinarily rich McArthur River mine in Canada, which boasts an average ore grade of almost 17 percent–which is about 100 times the world average of less than 1 percent. The mine will yield about 13.1 million pounds in 2011 and is expected to produce at a similar rate over the next four years. Meanwhile, management expects its long-delayed Cigar Lake mine (also in Canada) to yield about 1 million pounds of uranium in 2013 and up to 5.6 million pounds in 2015.

Rumors of nuclear power’s demise have been greatly exaggerated. Whereas Germany and Switzerland’s decisions to gradually shut down their reactors have captured headlines, the US, UK and France have largely affirmed their support for their existing nuclear power facilities. Although these developed nations may slow plans to add to their nuclear capacity, these countries were never the driving force behind the so-called “nuclear renaissance.”

Emerging markets such as China, India and Russia will continue to expand their reliance on nuclear power and drive demand growth for uranium. All three nations announced they would review their existing nuclear power plants and future plans. These countries have since resumed construction on new reactors. By 2021, 96 net new reactors are expected, 63 of which are under construction right now. This is a level of growth that hasn’t been seen since the 1970s.

Demand for uranium is expected to grow 3 percent per year over the next decade while the supply side faces constraints. In 2011, world consumption of uranium was 165 million pounds while only 143 million pounds were produced. A program that sells uranium from reprocessed Russian nuclear warheads winds down in 2013, which will take 24 million pounds of supply off the market per year. Meanwhile, new mines in Africa and other areas have higher production costs than established operations; over the long term, uranium prices will need to reach at least $70 per pound for these new mines to be economically feasible.

The spot price of uranium should top its 2011 high of $72 by the end of 2012 at the latest. Cameco’s stock price should follow uranium’s lead upward, but progress is likely to be slow due to continued investor risk aversion in the wake of the Japanese accident. Investors will come around, however, because the fundamentals of Cameco are strong and getting stronger. In fact, despite all of 2011’s difficulties, it was the company’s best year ever in terms of record annual revenue and gross profit from its nuclear business, as well as record revenue and realized prices in its uranium segment.

Cameco is rated as a “buy under 23” in the Personal Finance Growth Portfolio.