How to Invest in Nuclear Energy

Nuclear power may never inspire warm and fuzzy feelings like wind and solar energy do, especially given the industry’s history of cost overruns and environmental issues. But nuclear energy seems to be enjoying a renaissance, and investors might want to pay attention.

Three dozen reactors are now under construction around the world, and another 98 are in the works, according to the World Nuclear Association, an industry trade group. Here in the U.S., companies have filed applications to build 26 reactors. Congress has approved $18.5 billion in loan guarantees and other subsidies, and President-elect Barack Obama has indicated that he supports nuclear power as part of a broader clean energy program. It’s also a booming global business, with spending on new reactors expected to top $350 billion over the next decade, according to Richard Phillips, an analyst with S-Network Global Indexes.

So how to invest? The easiest way to go is with an exchange-traded fund, such as the PowerShares Global Nuclear Energy Portfolio (PKN). The ETF tracks the WNA Nuclear Energy index and holds a basket of 62 global stocks in the nuclear business, including utilities and construction firms. The problem with the ETF, though -- and nuclear stocks in general -- is that companies in the industry tend to be broadly diversified. Aside from France’s Areva, the biggest names in reactor design and technology are conglomerates such as General Electric and Toshiba. And there are dozens of niche companies with nonnuclear businesses.

Several of these stocks, however, look cheap. Take the Shaw Group (SGR), which has engineered and built reactors for decades and received an order from China in 2006 for four plants (with partner Westinghouse Electric). The firm also has contracts with domestic utilities for four new reactors and letters of intent for two more. The stock trades at just 9 times estimated 2009 earnings. “At these levels it looks like a good value,” says S&P equities analyst Stewart Scharf.

Nuclear plants also need fuel, of course, and tight supplies of enriched uranium should benefit USEC (USU), one of only four commercial uranium processors in the world. USEC has applied for federal loan guarantees to finance a new plant in Ohio, and the stock could tumble if those guarantees don’t come through, says analyst Laurence Alexander, of Jefferies & Co. Still, he figures the stock, recently at $4.80, could hit $11 as more utilities go nuclear and supplies of enriched uranium stay tight.