The recent stock market crash has provided many opportunities to buy shares at low prices. The problem is that in many cases we do not know just these prices are good value. This is because we still do not really know what implications the coronavirus and lockdown are going to have for the economy and specific businesses.
With that in mind, I think one of the best investment strategies is to look for companies whose operations and business models will not be impacted by the pandemic. In other words, I would buy shares in companies that are resilient and that could come out the other end stronger. I think I’ve found just the company.
Coronavirus immunity?
Yellow Cake (LSE: YCA) specialises in buying and holding uranium, aiming to benefit from the appreciation in the value of its holdings. Profits are realised by selling its uranium to nuclear power plants or to traders.
The company does not mine the uranium itself, nor does it store it at its own facilities. Instead, it purchases it sporadically from the world’s largest uranium miner, and pays for another company to store it on its behalf. It’s a low-cost operating model, that is not impacted directly by the coronavirus.
Yellow Cake only became a listed company in 2018, raising £180m, which it then spent on buying uranium. It now holds over 9m lbs of it, valued at $312m in mid-April. Since acquisition, the value of its holdings has risen by 26%, giving the company a net asset value of £2.88 per share. Compellingly, this is 30% above the current share price.
Management is convinced of the positive long-term outlook for the uranium price, considering the market to be structurally mispriced. This confidence comes from a predicted supply-demand imbalance that is the result of uranium producers severely reducing production over a number of years. This imbalance is only magnified by coronavirus, with miners shutting down or scaling back production.
Despite negative headlines surrounding nuclear energy, it plays an important role in the global energy mix. And it makes heavy use of uranium. This looks set to continue, with China, India and Russia all committed to building a significant number of new reactors. Worldwide, there are 54 nuclear reactors under construction, with a further 109 planned. The US Energy Information Administration predicts a 29% increase in nuclear-generated power by 2030.
What’s mu verdict?
OK, this stock is probably not for the faint-hearted. The company does not have much of track record to go by, and doesn’t pay a dividend either. But there is a strong investment case. What’s more, I think its discounted share price – the shares trade at only eight times last year’s earnings – makes it especially attractive.
Crucially, Yellow Cake looks likely to be unharmed by the pandemic. Quite the opposite, I feel. The company has no debt and does not employ large swathes of people. And forced production shutdowns sent the uranium price up 11% in March alone. I think this is a risky share, not least for its dependence on an industry that is inherently risky. But I also think that it could help to diversify any portfolio, and provide significant returns to boot. For that reason, I’d buy the shares.
