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The RIGHT Nuclear Stocks Look Cheap

March 16, 2011 – by Richard Band

You can say one thing about the bulls: It’s not easy to herd them back into the pen. Shortly after today’s opening bell, the Dow plunged, screaming, into a 292-point chasm. But then, as happened Monday, buyers soon plucked up their courage. Slowly, the indexes began to climb out of the void.

At the close, after some encouraging words from the Fed about the state of the economy, the Dow had retreated “only” 138 points — still a loss, to be sure, but a victory of sorts when you consider the dire news out of Japan.

Utility stocks fell harder today than industrials, with the Philadelphia Utility Index shedding 1.9%. The reason, of course, is that many utilities operate nuclear power plants.

In the wake of Japan’s troubles, we can expect regulators to take a much tougher line on licensing new reactors, and re-licensing old ones. It’s also likely Congress will jump into the act, holding hearings and perhaps passing legislation that would impose new safety requirements.

At this point, though, I don’t foresee mass closures of existing U.S. nuclear plants. The industry has had a generally good safety record, especially since the Three Mile Island incident in 1979, and very few U.S. reactors are situated close enough to geological fault lines to arouse significant concern.

One potential exception is Diablo Canyon, owned by PG&E Corp. (NYSE: PCG). PCG maintains that Diablo could operate safely through a 7.5-magnitude earthquake. According to a company spokesman, the four faults near the plant could at most produce a quake of 6 to 6.5 on the Richter scale. There’s a big difference between 6.5 and 7.5 — 10 times, in fact. So, if PG&E’s assessment of the situation is correct, Diablo enjoys a fairly wide margin of safety.

Undoubtedly, though, California regulators (as well as the NRC in Washington, D.C.) will want to have more research done to assure that these figures are accurate. We can’t rule out the possibility that PCG might have to upgrade, at considerable cost, the quake protections engineered into the plant.

For now, I’m inclined to wait and see. On earnings and dividends, PCG looks quite cheap, as do Entergy (NYSE: ETR) and Exelon (NYSE: EXC), two utility stocks that specialize in nuclear generation. If you own any of these three, you might as well hold them.  Ditto for Germany’s E.ON AG (OTC: EONGY), which has also gotten swept up in the panic.

But I would defer new purchases at least until we find out how quickly the Japanese can bring their crippled reactors under control. That will be a key factor, I believe, in determining whether the Fukushima disaster causes serious, lasting damage to the industry and nuclear stocks in other parts of the world.