The S&A Digest: Uranium Stocks Are Ready for a Correction

The proper horseshoe distance… More BBQ tips… Breaking the cardinal rule… No more Verizon?… More signs of a top…

 Important fact for the summer: Horseshoe irons should be 40 feet apart. At a barbecue last weekend, your editor had to defend the distance between the pits in his backyard.

 Another barbecue tip: Try putting a little bit of caviar (doesn't need to be anything fancy) on top of your deviled eggs. You'll be the king of the rednecks.

 As you've seen over the last week in our mailbag (here, here, and here), members of the S&A Alliance routinely say it is one of the best investments they've ever made. But… your chance to join the ranks of our most exclusive membership expires today. There's no better way for you to get our best work – including our S&A 16 Model Portfolio, our latest Where to Put Your Money Now report, an invitation to our exclusive members-only conference… and a lifetime subscription to our newsletters.

 We're in Hatteras, N.C., this week, staying with friends and family at a huge rented beach house. The miracle of wi-fi allows us to do our work… and gets us out of doing most of the household chores. "Sorry honey… I've got to go do some work."

 "So… do you think I should sell my RadioShack?" Oh no. On my recommendation, about a year ago, one of my in-laws bought shares in RadioShack. I'd broken a cardinal rule of investment research: Never give your family or friends a stock tip. No good deed goes unpunished. "You know… the thing has dropped $5 this week. I've lost a lot of money."

Turning away from the sunset, putting down my beer… reluctantly: "Mmn… well, I don't know… I haven't looked at it recently. But I know it has been one of the best-performing stocks in the S&P 500. You bought around $18, right? So… you've made a lot more money than you lost, right?"

"Well, yeah… it's up. But if I'd sold at $35…"

"Why would you ever sell a good business like that, when you got your shares at such an absurdly low price? I mean, when you bought the stock, the market cap was about $2.5 billion, right? And, even in not-so-great years, like the last several, RadioShack makes about $300 million in cash earnings. So… your shares… in a bad year… are producing an earnings yield around 12%. Where is your money going to be treated better than that?"

"Oh… I never thought of that."

 Financial Times reported this weekend that British telecom giant Vodafone (VOD) was mulling a $160 billion bid for PSIA pick Verizon (VZ). Vodafone announced today that it had no plans to purchase Verizon. Shares of Verizon gained more than 2% to $42.75 today. Shares were as high as $46.40 before Vodafone denied the claim.

 William Ackman has purchased a 9.6% stake in Target for $1.98 billion. Ackman believes shares are undervalued, and he will hold talks with management about releasing that value. He said Target has "a differentiated brand, significant growth opportunities, and the strongest operating management in the retail industry." Pershing Square, Ackman's fund, will donate one-third of the realized after-tax profits from the Target investment to charity.

 Medical Investor pick McKesson (MCK) will buy Awarix for an undisclosed amount. Privately held Awarix makes a patient-care visibility system to identify delays and improve hospital wait times.

 Signs of a top in private equity… Kohlberg Kravis Roberts has cancelled three debt offerings in three weeks, as subprime defaults are reducing demand for risky debt. Most recently, KKR cancelled the sale of $1.4 billion in loans to Dutch home-improvement retailer Maxeda.

 Signs of a market top… The Teacher Retirement System of Texas is planning to move one-third of its $112 billion in assets into alternative investments including hedge funds and real estate. Pension funds are historically the most conservative of investors.

 In the mailbag… the ultimate subscriber question: Who is the best analyst at S&A? Don't worry, my feelings aren't going to be hurt. After all, I hired these guys. I know they're better than me. Tell us your choice and why: feedback@stansberryresearch.com.

 "Greetings from a 'Desert Gator' in Scottsdale, Ariz. Can you give a brief outline of some of the routine things that we should look at? Maybe a checklist of things to consider when looking at a stock to help determine if we should look or dig deeper. I'm new at this stuff and would like something to help get me on the right track quickly." – Paid-up subscriber Vernon P

Porter comment: Great question. Before you look at the stock, do your money-management checklist first: What's the proper position size? What's the proper stop loss? These answers depend on whether or not the stock is safe… or a speculation. How can you tell? Look at the business. Is it stable? Does it pay a dividend? Is it attractively priced? Could it afford to buy back all of its outstanding shares? How much cash does it earn as a percentage of its market cap each year? How much debt does it have?

 "I now truly understand how tough Dan's job [is] and Mr. Omaha's comments. The big part of investing is all about reading and making judgment. It is not a funny job. Since March [of] this year, [when] I decided to take my money back from the funds manager, I have subscribed to more than 12 different researches (cost me almost USD $7,000) and I can never finish following up on the information flooding in. (Since I wanted to keep up with everything before they expire. By the way, this is in addition to finishing the books you recommend) If it is not because the falling of USD like a hanging sword above the head (for OZ like me), I would bet 100% Alliance is the best for value for lifetime investing. You guys do the hard work, and subscribers can enjoy the fun of investing." – Paid-up subscriber Rachel

 "I love the stories. I love the advice – and I am making money. I have upgraded several times, and what I make with the new advice continues to pay for my upgrades, and then some. But... I have one very hard question for you. In your last 'free' offer on Jeff Clark, you state that 'today Jeff is our No. 1 analyst.' I'm a big fan of several of your analysts who in past offers have been described various ways but always as superb. So is Jeff really your No. 1 analyst, or was it just for the day you ran the ad?" – Paid-up subscriber Don

Porter comment: Jeff is our very best trader… by far. In terms of returns per day invested, nobody comes close to Jeff, according to his proven track record. Understand, however, Jeff is the only member of my staff that intentionally aims for short-term profits. He's also a great analyst – probably our most experienced. But who is our No. 1 analyst? That's a question that our readers should decide. What do you think?

 "No Lincoln – Have an all original '76 Eldo Convertible with 500 cubes and about to turn over 40K miles. The last year of the big cad convertibles. It needs to have dust and dirt from its K-9 garagemate cleaned off and detailed to show as new. It is white with red leather and was one of three owned in Denver – bought when it was said there would be no more, then sold when the doctor said there aren't garages in either of the places where [the owner] may go. Then to Phoenix... One summer drive and a trip [through] Christmas lights with the top down each of the last 5-6 years. At about $5/pound, it comes to $30K. New mid-size cad's run about $15/pound and no US-made ones flip their tops… Steer horns for the Boss Hog look are extra $$." – Paid-up subscriber Lee Arnold

 "Porter – http://www.classic63lincoln.com/." – Anonymous

 "You and Dan really put your hearts and souls into this thing you do... you're not just selling us a shtick... as if I have to tell you guys. At least one person out here recognizes it, anyway. Those were great July issues you put out. To Dan – I, too, have had a rather poor reception at times when I did my best to just 'lay it on the table' in everyone's best interest. You just can't please everybody, and sometimes you need to say what people don't like to hear. Thank you for great reading and great insights." – Paid-up subscriber Sally E.

 "Mr Ferris: This month's newsletter was nice work. I personally don't like the pick, so I am going to start buying it." – Paid-up subscriber Paul Aikey

Porter comment: You know you've finally become a true contrarian when you find yourself buying stocks that you know, only a few years ago, you would have avoided like the plague.

 "Hey Porter, how much for an Option on the Alliance Deal? Just finished Dr Steve's 'Buying Calls is a Walk on the Beach.' We really do read your stuff. I am a new subscriber as of 7/3/07 with the Digest letter. It is going to take a little time and some really good trades to come up with the dough. Also tell the cry babies to put the dolls down, take off the skirt, put on their pants, and act like guys. No offence to the female gender. Keep 'em coming." – Paid-up subscriber Brian

Porter comment: Well… the S&A Alliance has a built-in option. We offer a money-back guarantee for a year. Try it. See if you can use it.

 "I'm fairly new to your newsletter and forum. It seems to me to be mostly past tense. You [toot] your own horn and lots of could've and should'ves. HOW about more 'Our research indicates that XYZ is going to go bonkers!' It's easy to fill a newsletter about the past, how about the future?" – Paid-up subscriber Bernie Santos

Porter comment: What are you reading? That doesn't sound like any of our newsletters.

Uranium Stocks Are Ready for a Correction

By Ian Davis 

When investing in a commodity, the spot price of that commodity never goes straight up. Instead, it rises and falls, reflecting the release of bearish and bullish news reports or forecasts.

But amazingly, one commodity has been an exception to this rule for more than three years…

The price of uranium has risen tenfold since December 2003… a compound annualized gain of more than 92% per year.

Not only did the uranium price skyrocket… but did so without a single correction.

This July, uranium prices fell for the first time in more than three years.

 So will this month's correction turn out to be a short-term blip? Or is this the beginning of a sustained decline in uranium prices?

According to Bloomberg, a number of factors could push down uranium prices further. For one, "demand from utilities to fuel nuclear reactors has plunged 72 percent from an April 6 peak."…

Also, "in the second week of July, 3.4 million pounds of the metal was available, more than three times the amount purchased by power companies."

The following chart shows the price of uranium. Even on a log-scale chart, the price goes parabolic before reaching its peak this May.

Uranium Down for the First Time in More Than Three Years  

Now let's take a look at uranium producers…

The share price of Cameco Corp., the world's largest uranium producer, peaked in mid-June, shortly before the fall in uranium prices, and has since fallen by 10.4%.

Currently, Cameco Corp. is significantly overvalued in relation to its historic price to book value, price to earnings, and dividend yield.

The price to book value of Cameco Corp. is 6.84, almost 400% above its median value of 1.39. Similarly, the price to earnings is 72.3% above its historic median and the dividend yield is 69.6% below its historic median.

The following chart shows Cameco's share price in relation to its price to book value since 1998. As you can see, the share price has increased significantly faster than the company's book value.

Cameco Is Trading at Seven Times Its Book Value  

However, there are a lot of positive things about Cameco Corp. For one, unlike many of the junior uranium companies that have sprouted up over the years, Cameco is actually producing uranium from numerous mines. And it owns the world's largest undeveloped high-grade uranium deposit at Cigar Lake, which is slated to begin production in 2010.

Conclusion

I believe that the price of uranium will not be able to sustain this meteoric rise. However, getting in front of this freight train may get you run over.

Shorting the uranium producers would be a better trade. However, if you short Cameco, you'll be getting into an already overcrowded trade. According to Bloomberg, "Investors in Cameco Corp… in June placed a record number of wagers the stock will decline."

With a record number of people already shorting, a renewed rise in uranium prices could cause these short sellers to cover their positions, leading to a significant amount of bullish pressure on the stock price.

A better short than Cameco can be found among the junior uranium companies… many of which have no real prospects of producing uranium but have shot up all the same as a result of the bull market.

For example, a quick screen on Bloomberg produced dozens of companies with "uranium" in their names… that were also formerly known as something else….

Like, Ultra Uranium Corp. LTD, formerly known as Buck Lake Ventures LTD, formerly known as Home Ventures LTD… Or Utah Uranium Corp., which was known as McNab Creek Gold Corp. earlier this year.

Whenever companies start changing their names to take advantage of hype, beware.

Good investing,

Ian Davis

July 16, 2007

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