How to Find the Cheapest Uranium Stocks

I sold my Sprylogics holdings today for a decent gain in favour of two stocks. One of them is Bioexx Specialty Proteins (TSX:BXI). I have my reasons for that pick. The other is Purepoint Uranium (TSXV:PTU). I wanted to get into the Uranium market today and as you'll read on further you'll see why I feel its the cheapest Uranium stock out there.

Uranium is a very interesting sector to try to trade. The sector is made up of two types of traders - those who think they know everything, and those who know nothing. There's a very simple rule of thumb you need to know to be a successful long term trader of Uranium Stocks - it's all the same crap. And if one of the crap companies swings too high relative to another, it's time to sell the first one and buy the other. Two main events in the industry have taken place over the past year that have driven Uranium stocks to similar wild swings in stock prices and mostly huge losses - the Japanese earthquake and the buyout of Hathor Exploration. Take a look at the long term chart of Denison Mines (TSX:DML) vs Uranium One (TSX:UUU):

DML vs UUU Chart

You couldn't get two more dissimilar companies within one industry. Denison operates primarily in the relative safety of North America, Uranium One is tied to Northern Asia as their primary interest is located Kazakhstan and they are half owned by Russian interests. This leads to short periods of time when the stocks perform vastly different in the market. Referring to the chart, while UUU imploded in 2007, DML held up relatively well. But in the end it caught right back up to UUU in terms of terrible performance in October 2008. By the end of March 2009, UUU had actually been a huge winner, moving from 91 cents to nearly $3 in less than 6 months. Meanwhile DML, which was double UUU's price in July 2008 at over $8 now sat at less than $1, about a third of UUU's price. Barely 6 weeks later and both stocks were hanging around the $2 mark as DML made a quick double while UUU came back down.

Just before the Japanese earthquake last spring, Uranium was hot. UUU was doing particularly well, touching $7. DML was also up, but not nearly as much as UUU as it was $4. Since the earthquake, Uranium stocks have been pounded and both stocks came back down to the same long term historical level. Comparing them to five years ago, both stocks have lost 80%.

What does this tell you? Despite both of them having lost the bulk of their market cap since 2007, you could have made money by always investing in at least one of these stocks, but always the one that was very low in price relative to the other because eventually they will revert back to some long term mean. You would have avoided the severe drops in stock price from the stock that was priced too high while catching the 100%-200% price spikes that the one that was too low had. DML in general is about two-thirds of the stock price of UUU. If this ratio goes severely out of whack then you buy the one and sell the other.  

This theory works not just for these two, but all Uranium stocks in general, with the exception of Cameco. Since it's so large it will always outperform the others in weak periods for Uranium and underperform in strong periods. But of course you knew that big caps are always less volatile than small caps so this goes without saying.

This phenomenon seems to be exclusive to Uranium, in the mining sector anyways. Contrast the performance of DML and UUU with the 5-year chart of 5 of the most well known gold companies:

Gold company comparison chart

You'll see that while Kinross has lost 20% in the last 5 years, Goldcorp and Barrick are up 60% with Newmont and Yamana coming in order at around 40% and 20% respectively. Their divergence is long term. There are no spikes or sudden drops in any of them to take advantage of. That's the exact opposite of the UUU and DML chart where the stocks can swing wildly apart with one underperforming the other by 2x, 3x or more, only to eventually converge at some point in time.

What does this show? For something like a Gold stock, a company's location, cash flow, resources and management do make a difference in the long term. Kinross' underperformance has been apparent for 2.5 years while Goldcorp and Barrick have slowly peeled away from the pack.

For Uranium stocks, analysis means NOTHING. If one month there's some news event that makes UUU look favourable and it moves relative to Denison, buy Denison. Because you know Denison will eventually catch up to UUU, or UUU will eventually come back down to meet Denison. So how does this help finding the cheapest uranium stock?

Keep it simple. The easiest way to find the cheapest Uranium stock is to judge it by its 52 week high and 52 week low. You don't need to go through each company's MD&A to see how much resource they have in the ground or if it is in a location that's friendly for a buyout. The market has already determined that for you because if its price was once very high, that means something like a good resource find or plausible buyout rumour already took place in the past. Even if the market is stupid, don't pretend that you're smarter than it. PTU, PUC, YEL, BYU and the rest were all at high prices for some good reason, at some time.

If a stock is high relative to its 52-week high, watch out because it is currently in that "rumour" period which for everyone except Hathor generally hasn't worked out too well. It's better to buy the Uranium stock that no one is talking about today, because they will be talking about it tomorrow.

If a Uranium stock is far off from its 52-week high and close to its 52 week low, then you know that the stock doesn't have much more to fall (like UUU in October 2008 or DML in March 2009). See below for a straightforward chart that I made of all the significant Uranium companies I could find trading on the TSX. I listed their 52-week, their 52 week low, their stock price and how far off they are from each with the final column being a logarithmic ratio measuring how far they are currently off of their highs compared to their lows. The companies near the top compare the best when using this method.

Symbol	Hi	Lo	Now	x off of Hi	x off of Low	ratio
PTU	0.740	0.090	0.120	6.17	1.33	4.63
YEL	1.230	0.120	0.180	6.83	1.50	4.56
PUC	0.490	0.055	0.080	6.13	1.45	4.21
BYU	1.250	0.155	0.225	5.56	1.45	3.83
BSK	0.405	0.065	0.085	4.76	1.31	3.64
FDC	0.520	0.055	0.095	5.47	1.73	3.17
WCU	0.180	0.020	0.035	5.14	1.75	2.94
FIU	1.400	0.140	0.270	5.19	1.93	2.69
UNR	0.550	0.080	0.130	4.23	1.63	2.60
TVC	0.425	0.065	0.105	4.05	1.62	2.51
UCU	1.280	0.335	0.430	2.98	1.28	2.32
URE	3.350	0.790	1.090	3.07	1.38	2.23
EFR	1.590	0.200	0.380	4.18	1.90	2.20
URC	0.400	0.055	0.100	4.00	1.82	2.20
STM	1.680	0.320	0.495	3.39	1.55	2.19
CVV	1.700	0.300	0.490	3.47	1.63	2.12
VZZ	0.500	0.135	0.180	2.78	1.33	2.08
UAX	0.440	0.140	0.175	2.51	1.25	2.01
TUE	0.870	0.120	0.235	3.70	1.96	1.89
SUV	0.080	0.020	0.030	2.67	1.50	1.78
UUU	7.020	1.850	2.850	2.46	1.54	1.60
NWT	0.240	0.085	0.115	2.09	1.35	1.54
MGA	1.100	0.175	0.365	3.01	2.09	1.44
CCO	44.280	17.250	23.230	1.91	1.35	1.42
PWE	0.650	0.080	0.200	3.25	2.50	1.30
U	9.500	5.000	6.180	1.54	1.24	1.24
ULU	0.110	0.030	0.055	2.00	1.83	1.09
DML	4.440	0.870	1.900	2.34	2.18	1.07
FIS	1.500	0.480	0.840	1.79	1.75	1.02
UEX	2.590	0.435	1.100	2.35	2.53	0.93
UWE	1.320	0.245	0.600	2.20	2.45	0.90
ESO	0.180	0.045	0.105	1.71	2.33	0.73

For instance, PTU closed at 12 cents today. The stock traded as high as 74 cents and as low as 9 cents in the past year. 12 cents is over 6 times off the high, but is only 1.33 times the low. The last column simply divides 6.17 by 1.33 to show that PTU is over 4.5 times closer to its 52 week low than its 52 week high using logarithmic scale.

This means if Uranium gets massively hot again, PTU could double or triple it's current price and still looks like it could run more based on how traders poured money into it on past speculation. On the other end, if Uranium tanks, PTU has much less downside vs the other Uranium stocks because it doesn't have much further to go. Are you're worried about PTU's location or resource size? Why? The market pushed it up to 74 cents last year for some good reason. There's always a chance it'll do it again or at least to a level much higher than today. Like I said, don't pretend that you're smarter than the market.

Put my theory to practice and you'll see it does work. URC was one of the top 5 picks using this method just a couple days ago. Today it rose 33% and now is in the middle of the pack. On the opposite end UWE was by far the lowest ranked stock when using this method and while most Uranium small caps did well today, it got hammered. That was based on financing news but it just goes to show you management knows when their company's stock is high relative to their peers and they will take opportunities like that. When a Uranium stock runs like that, its time to exit with your profits and find a sister company. Imagine how well someone did if they looked at this ranking yesterday and dumped UWE for URC or even the one at the top of the list PTU which had a nice run today as well.

It doesn't surprise me that #2 on this list is YEL for one reason. It's unusual name, Macusani Yellowcake. When the Uranium market is cold, people who own the stock know its a Uranium stock and will sell. However, when the Uranium market is hot, not everyone looking to put money into the sector will know that it's a Uranium stock and won't know to buy it. For this reason I cannot recommend it despite it being #2 on the list.

If you trade Uranium stocks, you know exactly how things work and you may have done this yourself. If you see, for example, UUU and UWE up 20% or 30% on heavy volume in a day, the first thing you'll do is check Stockhouse or Globeinvestor or wherever you get your TSX information and look up any stock with the word Uranium in it. You might also think to look up the word energy. There's no way that in this 2 minutes of research before you decide to get in for the Uranium run are you going to think up the word Yellowcake.

You either know YEL is a Uranium stock going into the run and you take your chances that'll it'll join its sister stocks or you don't. You're not going to be introduced to the world of YEL like you will PTU, PUC or any other beat up Uranium stock in this quick research. For this reason there's a good chance YEL could continue to underperform other Uranium stocks in a huge run, at least in the short term. It's the dumbest thing, but you know its true. Traders will leave YEL behind simply because they can't find it easily. There's probably more uranium stocks that could rival PTU for tops on this list except I can't even find them myself. That makes PTU the cheapest Uranium stock on the TSX, that can be easily found anyways.