Should you buy Cameco while it is below $124?

uranium producer cameco (NYSE: CCJ) It has a strong history. However, the current share price is in uncharted territory. The stock is trading very close to its all-time high of about $124 per share. Should you get in while it’s trading just below that price? Here are some things to consider before making your final investment decision.

Cameco is linked to the nuclear energy industry. However, the company does not produce energy; is an industry supplier. Historically, it has mined and processed uranium. It still does, but it recently bought half of Westinghouse, which serves the nuclear power industry. Still, as Cameco stands today, it’s a game of picks and shovels regarding nuclear energy.

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Westinghouse is a fairly reliable cash flow generator. Uranium mining, on the other hand, has a history of being a volatile business. Uranium is a raw material and its price rises and falls depending on the dynamics of supply and demand in the industry. Cameco tends to use long-term contracts to help protect its cash flows from commodity swings, but there’s no way to completely avoid the impact.

Right now, nuclear energy is in high demand due to the growing demand for electricity driven by technologies such as artificial intelligence and electric vehicles. This has investors excited about the uranium sector. However, nuclear power has fallen out of favor before, usually after reactor meltdowns. The last crisis of this type was Fukushima in 2011, after which uranium prices plummeted. Not surprisingly, Cameco’s share price also fell dramatically.

The simple story here is that more demand for nuclear energy will lead to the construction of more reactors. More reactors mean more customers for Cameco’s uranium. This alone could be considered positive. But remember that uranium is a commodity. The growing demand for nuclear energy is the demand side of the supply/demand equation. Something interesting is also happening on the supply side.

Cameco estimates that by 2030 there will be a small gap between supply and demand. That gap will increase over time, even with the investment currently planned in the industry’s output. The gap, if demand trends remain the same, could become a chasm the size of the Grand Canyon. In that scenario, uranium prices would likely skyrocket.

Wall Street tends to look to the future, so this perspective is being factored into Cameco’s current share price. Over the past five years, the company’s share price has risen more than 800%. At the current price, Cameco’s price-to-sales ratio is 21, compared to a five-year average of around 8. Its price-to-book ratio is 10.8, compared to a long-term average of 3.1. Both metrics suggest the stock is expensive today.

That said, the go-to valuation metric is typically the price-to-earnings ratio. Cameco does not have a five-year average for this metric due to losses over that period. However, the current P/E ratio of 140 is surprisingly high in absolute terms.

If you’re wondering if you should buy Cameco today, the answer is, unfortunately, it depends. The stock looks expensive, so anyone value-inclined will probably want to avoid it. However, if the supply and demand dynamics develop as expected, there could be a significant increase in the company’s sales and profits.

That said, to buy Cameco today while it remains near all-time highs and trades at what appears to be a very high valuation, you need to believe that Wall Street is not yet fully pricing in the long-term opportunity.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has posts on and recommends Cameco. The Motley Fool has a disclosure policy.

Should you buy Cameco while it is below $124? was originally published by The Motley Fool