Beware of Fads

I have written a couple of times about the uranium stocks. Most people that have traded them have made money. The appeal is quite simple. Nuclear power is cleaner and something that the US can create and reduce its dependence on OPEC (I realize there are several obstacles along the way but this is the simplest way to state the case). I am aware of two uranium stocks Cameco (CCJ) and USEC (USU). There are probably others.

Both stocks have soared. I would imagine that a big part of the move was from a lack of supply in the group. Whether there are more than two names or not I only hear about two and I think that is true for most people, perception not reality being the driver.

If you have made money in these it would makes sense to have enough introspection to realize the move may have been more about luck than skill. I first mentioned these stocks January 28th. Since then they are up 30% or so. Clearly I should have bought one of them but I didn't. My thinking here was there was money to be made was based on a couple of stock market related things, not my in-depth understanding of uranium. When fads start they can last for a very long time. For all I know CCJ could quintuple over the next couple of years but that the fad element will not go away until it implodes (if that happens).

Another way to play uranium is with Rio Tinto (RTP). RTP has uranium operations in Australia and Namibia. If uranium becomes huge, RTP will benefit and if uranium drops off the radar RTP will not take the hit that CCJ and USU would take.

I'm no expert here. But the stocks have taken off before much of the story has even started to play out. The run in the stocks will likely end before the story plays out.

We could say the same thing about another energy sub-sector; coal. The US is the Saudi Arabia of Coal. Except china produces a lot more than the US. Coal stocks have done very well also. The big difference between coal and uranium is that there have been a lot of coal IPOs. Take that to mean more supply has come to the market. This is a watch out situation. At some point supply will overtake demand. I think the coal story has a long way to go but who knows? Making a huge bet on coal could be costly.

In a diversified portfolio if you have 10% in energy, 4%-5% could be aggressively devoted to either fad. If your stock triples you are adding a lot of performance to the entire portfolio. If the stock cuts in half the damage may be unnoticeable in the context of the overall portfolio.