In the classic 1985 film “Back to the Future,” Doc Brown builds a time machine that runs on plutonium. While this seemed like science fiction at the time, it is becoming a reality. In fact, you may already be charging your Tesla with nuclear power.
This week we use the film’s theme song “Back in Time” as inspiration for a discussion on an investment theme in our portfolio — nuclear power and uranium.
The thesis — the power needed to power our technology-fueled world will require more power than many understand. As the world looks for clean sources of efficient power, nuclear power will emerge as a key piece to powering our future.
We know nuclear power will help fuel the many data centers being created around the world, and we know what you are thinking: It is not safe. The government will never allow this to happen. It will take too long.
Well, those objections are all wrong. As evidence, on Sept. 20, Constellation Energy (NASDAQ: CEG) announced that Three Mile Island would be reopened to provide nuclear power. Also, Oracle (NYSE: ORCL) announced on its recent earnings call that three small modular reactors would fuel a new data center, with these SMRs able to significantly speed up the deployment time of nuclear power.
The main rebuttal to the nuclear argument involves government regulations, so we wonder why more people aren’t aware of the ADVANCE Act passed in July of 2024. The ADVANCE Act, short for the Accelerating Deployment of Versatile, Advanced Nuclear for Clean Energy Act, is legislation that aims to speed up the deployment of nuclear energy capacity.
This legislation includes new incentives for advanced nuclear reactor technologies, accelerated licensing, guidance for the Nuclear Regulatory Commission (NRC) to license and regulate microreactor designs, elimination of costs for pre-application activities, and early site permitting.
Hello … McFly
As traditional clean energy sources like wind and sun have proven ineffective to provide meaningful, efficient power, the world looks for answers. Answers that are more reliable than the weather and that work when the sun isn’t shining. Guess this seems a little obvious now.
Where Are We Going This Time?
We still believe in natural gas as the main source of power. This is a fact today and we believe it will continue to be a fact in the future. We don’t see nuclear power replacing natural gas, but rather complementing it as the former is reliable for continuous base load power and the latter excels in shifting its output quickly based on fluctuating power demands. And while natural gas continues to be our country’s tried-and-true source of power, we’re excited to see nuclear power continue to grow in significance.
This Sucker Is Nuclear
According to the World Nuclear Association: the United States is the world’s largest producer of nuclear power, accounting for approximately 30% of nuclear electricity generated across the globe. In 2022, nuclear reactors in the U.S. produced 772 TWh, representing 18% of total electrical output. With Georgia Power’s nuclear power reactor Vogtle 3 becoming commercially operational in July 2023 and Vogtle 4 in April 2024, total electrical output is slated to increase.
Great Scott!
We imagine Doc would exclaim his famous saying at the prospect of an enhanced nuclear-powered future for America as well as at the nuances facing the industry, ranging from its benefits, challenges, global competition and beyond.
It's hard not to be impressed by the benefits of nuclear power. When it generates electricity, it does so with minimal carbon emissions. And it’s fuel efficient: a small of amount of uranium or plutonium can generate a large amount of electricity. As for reliability, nuclear plants can provide a continuous supply of stable base load power, whereas renewable energy sources are affected by environmental variability.
These benefits come with challenges though. There’s currently only an interim plan for radioactive waste — Congress must approve a permanent solution for long-term safety. And despite modern advancements, accidents like Chernobyl, Fukushima, and Three Mile Island still serve as warnings. Additionally, building new plants requires significant time and capital, so it’s not a quick-fix energy solution.
All that said, the U.S. can’t ignore the global expansion of nuclear power. We may have 93 reactors, but between 2020 and 2035, China plans to build 150 new reactors, while Russia aims to complete 34 by 2042. Additionally, several nations have committed to tripling global nuclear capacity by 2050.
Input the Destination
Even with global nuclear capacity set to increase, America is still the global leader in nuclear power production. A recent CNBC interview with U.S. Energy Secretary Jennifer Granholm indicates the country will continue powering up.
“The hyperscalers for these big data centers all have commitments to clean energy … they’re committed — they’ve been telling us — to bringing that power with them,” Granholm said, “which is why the need for nuclear small modular reactors, colocating data centers with small modular reactors, or the partnerships, for example, with Constellation and Microsoft for Three Mile Island” are going to drive nuclear power production.
And while some may not want to go “Back to the Future,” we’re analyzing the companies harnessing nuclear power to increase profits so we can map a future powered by healthy returns.
Where We’re Going, We Don’t Need Roads
We are clearly witnessing a global resurgence of nuclear energy. The news this past month further confirmed this thesis. Even before new nuclear power facilities come online, there is already an imbalance between the supply and demand for uranium. Given this setup we remain excited about the future of this clean power source.
However, investing in uranium and affiliated companies can be frustrating as this is a volatile space with wild swings based on headlines. This is true of most investments based on events expected to occur in the future. The research team at Lear is convinced nuclear power will play a key role in powering the world’s tech-driven future and right now we are invested in the space.
Disclosures
LIM is a Registered Investment Advisor based in Dallas, Texas and registered with the Securities and Exchange Commission. Registration does not imply a certain level of skills or training. LIM is a company with purpose, dedicated to creative and unique thinking. We focus on portfolio valuation and research, along with a superior client experience. We seek to identify investment opportunities by looking at economic factors, security valuation and human behavior. We start with the fundamentals of portfolio management and valuation. Then we build on these fundamentals with unique thinking and creative intelligence gathering to form a viable investment thesis. We believe this approach leads to dynamic global portfolios with increased return and managed risk. LIM utilizes Charles Schwab & Co. Inc. (“Schwab”), a FINRA-registered broker-dealer, member SIPC, as its custodian of assets. LIM is independently owned and operated and not affiliated with Schwab. For additional information please contact LIM at 214-445-5900 or visit our website at www.learim.com.
Additional disclosures:
This document may contain forward-looking statements based on LIM’s expectations and projections about the methods by which it expects to invest. Those statements are sometimes indicated by words such as “expects,” “believes,” “will” and similar expressions. In addition, any statements that refer to expectations, projections or characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guaranties of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual returns could differ materially and adversely from those expressed or implied in any forward-looking statements as a result of various factors.
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Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments involve greater risks than traditional investments and should not be deemed a complete investment program. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain. The value of the investment may fall as well as rise and investors may get back less than they invested.
Bonds are subject to interest rate risks. Bond prices generally fall when interest rates rise.
Investment in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.
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Definitions
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The Russell 300 Index consists of 3,000 large U.S. companies, as determined by market capitalization. This portfolio represents approximately 98% of the investable U.S. equity market.
The VIX is a trademarked ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge. It represents one measure of the market’s expectations of stock market volatility over the next 30-day period.
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Ibovespa Brasel Sao Paulo Stock Exchange Index is a gross total return index weighted by free float market cap & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange.
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The Bloomberg U.S. Investment Grade Corporate Bond Index covers U.S. dollar denominated, investment-grade, fixed ratee or step up, taxable securities sold by industrial, utility and financial issuers. It includes publicly issued U.S. corporate and foreign debentures and secured notes that meet specified maturity, liquidity and quality requirements. Securities included in the index must have at lease 1 year until final maturity and be rated investment-grade (Baa3/BBB-/BBB+) or better using the middle rating of Moody’s, S&P, and Fitch.
The Bloomberg US High Yield Index covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. A small number of unrated bonds are included in the index. The index excludes emerging markets debt.
iShares 1-3 Year Treasury Bond ETF is an exchange-traded fund that seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities between one and three year
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iShares iBoxx Dollar Investment Grade Corporate Bond ETF seeks to track the investment results of an index composed of U.S. dollar-denominated, investment grade corporate bonds.
Invesco Senior Loan ETF which is an exchange-traded fund incorporated in the USA. The Fund tracks the market cap weighted S&P/LSTA US Leveraged Loan 100 Index, which represents the 100 largest loan facilities in the leveraged loan market. Each week the index is reviewed to reflect early principal repayment and to ensure that no loan becomes more than 2% of the index.
iShares iBoxx High Yield Corporate Bond ETF is an exchange-traded fund incorporated in the USA. The ETF seeks to track the investment results of an index composed of U.S. dollar-denominated, high yield corporate bonds.
Bloomberg Commodity Index is comprised of futures contracts and is designed to be a highly liquid and diversified benchmark for commodity as an asset class.
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S&P 500 Equal Weighted Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 Equal Weighted Index is allocated a fixed weight – 0.2% of the index total at each quarterly rebalance.
Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
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