Cameco Corporation (CCJ) recently had a very large number of call options purchased that are out-of-the-money. This indicates an investor or group of investors are very bullish on the uranium mining company's prospects. Investors may end up jumping on the bandwagon, even though the stock is already up over 15% in the last month.
Undoubtedly the investors in these call options believe that the world's sudden interest in nuclear power is not going away anytime soon. In fact, France just announced that Electricitie de France (EDF) has committed to restarting all its nuclear power reactors by winter. At present 32 of the company's 56 reactors are down for maintenance which needs to be turned around as the country depends on nuclear energy for 67% of its power.
Given that Russia is turning the screws on Europe by cutting it off from natural gas supplies, the thinking is that eventually, other countries like Germany will also have to move to nuclear power again.
Unusual Stock Option Activity in CCJ Calls
The bullish activity in Cemco Corp calls can be seen in the Unusual Stock Options Activity report by Barchart below:
This shows that two large tranches of call options were bought recently. The first tranche for 22,667 would have cost $3.173 million (i.e., 22,667 calls x $1.40 x 100), which is 224 times the regular open interest (amount of contracts normally held). The investor(s) was willing to pay this with the assumption that CCJ stock will keep rising quite significantly over the next 3 months. The strike price at $37.00 is 28.38% over today's price. So the investors put up a substantial sum believing CCJ will move up 29% by Dec. 16.
The second tranche has a lower hurdle. The investor(s) believe the stock will rise over 7.6% from today to $31.00 per share. They likely paid $6.83 million for 22,774 call options at the $3.00 mid-price for the options. This resulted in 62 times the normal open interest in the stock.
Where This Leaves Investors in CCJ Stock
The problem now for investors who might want to copy this activity is that CCJ stock already has a high valuation. For example, according to Barchart analysts forecast 20 cents in earnings per share (EPS) this year and up to $1.05 EPS for 2023.
That puts CCJ stock, at $28.82 per share, at 144x this year's earnings, but just 27.4x for 2023. Seeking Alpha reports that their survey of 11 analysts has an average EPS of 75 cents. That gives it a 2023 multiple of 38.5 times.
So investors project a valuation of between 27x and 39x for the company. In other words, they project a massive explosion in earnings, which justifies the huge price gain recently.
The problem is that at the $37 strike price, the breakeven multiple is at best 35x earnings for 2023, implying that investors expect it will rise to $45 to $50 in order to make a profit. That means they foresee the stock rising to at least a 43x earnings multiple.
In other words, this has tinges of a greater fool theory play. Investors might want to be careful here and assess the risks before diving in and copying this unusual stock options activity.
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