Saturday, March 19, 2011

A Long Nuclear Winter for Nuclear Stocks

The nuclear industry was one of the sexiest story for 2010. With the BRIC's rising fast, the world's hunger for energy looks insatiable. Renewable energy, bio-fuel, oil sands, nuclear were the buzz words. Nuclear was special though. It's clean, cheap and scalable in a big way. It can contribute 25% to the global grid if the world's govt put in the effort. Some developed countries are at that ratio. France, the No.1 nuclear supporter, is at 70%. Sadly for the world, today it's still a miserable 14%.

Undoubtedly it will go down below 10% in the next 10 to 20 yrs, thanks to what had transpired at Fukushima. Almost every country with major nuclear plans started talking about holding back, including the US, France, UK and India. Germany, a country that had never believed in nuclear after Chernobyl went a step further to expedite the decommission of existing plants that are deemed too old. Finally, a couple of days ago, China the last man standing, decided to review its nuclear power plans.

As for nuclear stocks, which were darlings just a couple of months ago, became dogs. On average, they were down 30%. Some of those most badly affected by Fukushima were down 40-50%. Some are now trading at 10x PE multiple, as compared to at least 15-20x when the story was hot.

I guess the lesson learnt here is one on valuation vs story: never pay for a sexy story. Just like Buffett, he is known never to pay for growth. Value investors should follow Jerry Maguire. Show me the money first. Buffett pays a good multiple for a good franchise, with strong track record but not for concept, nor sexy growth. Well he did buy BYD, but he paid HK$8 for HK$0.60-0.80 earnings ie 10-13x at that time. That's not so bad. You have to give it to him lah.

If you have a hunch for a good story e.g. nuclear or smart grid or cure for cancer, look for beneficiaries but also look at the multiple. If it's 10x, well that's a no brainer, buy. If it's 15x, then you need to ask, okay, is the growth going to be more than 15% and how sustainable is that, 2 yrs or 5 yrs or 10 yrs? If it's 20x, then forget it, even if it makes the growth, you have paid $1 for $1 worth of goods, there is no additional upside.

The nuclear stocks were just that. trading at high teens, the growth was factored in and when Fukushima came about, they cracked, like a Singaporean having a hard time in Mumbai, after drinking its water.

So now is it time to buy nuclear stocks? Sadly, I don't know. Some of them are now 10x, yes that is cheap, but earnings might decline going forward. After Chernobyl, we know the industry is not going come back for a long time. Last count, it's about 25 years. It's a long nuclear winter ahead. Maybe this time we are in a different era, we are really short of energy. Maybe the governments will finally get rational as they know that without nuclear, we are going to make the Arabs very rich and Qaddafi very powerful and that is not good. So they push ahead with their plans for more nuclear power. Well, that is wishful thinking perhaps.

As a last note, it is worth highlighting that for all the unfortunate souls who suffered or died from the effects of nuclear radiation since nuclear came about, the worst impact was not the pain nor the fear of dying. It was actually discrimination, by "normal" people. Imagine telling someone you just met that you are from Chernobyl in 1986 or Hiroshima in 1945. Next thing you know, they are ten feet away and running. Shunned by society, these victims suffered the most at the heart, not the body.

I hate reducing people to numbers, but it tells the story really well. So this is the punchline: The number of victims due to nuclear accidents since the birth of nuclear energy is less than 10,000 in all. In comparison, 20,000 coal miners dying every year. Not to mention the many millions more who get affected by polluted air and water. So should we be shutting down coal mines or nuclear plants?

For a solution that can solve a huge part of Earth's energy problem, Chernobyl and now Fukushima does really have a disproportionately huge negative impact far beyond what the media monkeys can imagine.

Anyhows, for now, let's just hope that our 50 heros at Fukushima can save the world this weekend!
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