As regular readers will know, there is no trading opportunity I like more than a market overreaction. As I know all too well from my own experience, news of any kind takes on exaggerated importance when you are focused on one narrow sector of any market. That applies whether the “you” refers to a person in a dealing room or an algorithm trained to react to key words and phrases and/or market moves. So, when the one-time market darling of nuclear power companies, Oklo (OKLO), a company that builds and operates nuclear power plants and is involved in nuclear fuel supply and recycling, announced a $1.5 billion at the market (ATM) equity raise a week ago, a selloff in the stock was just about inevitable.
Nuclear power has been all the rage after the Trump administration showed support, but apart from lowered guidance, there is nothing that hits a stock’s value quite like an announcement that the company will be selling more stock. Doing so dilutes the value of existing stock, while also often suggesting that the company is in dire need of cash given that equity raises are usually seen as a last resort for management.
A negative reaction to such an announcement is therefore understandable. But in reality, selling equity when a company’s stock is elevated is exactly what prudent boards and CEOs do. Giving them the ability to do so is precisely why the secondary stock market exists, so one could even argue that not doing it would be a dereliction of duty. It is…
As regular readers will know, there is no trading opportunity I like more than a market overreaction. As I know all too well from my own experience, news of any kind takes on exaggerated importance when you are focused on one narrow sector of any market. That applies whether the “you” refers to a person in a dealing room or an algorithm trained to react to key words and phrases and/or market moves. So, when the one-time market darling of nuclear power companies, Oklo (OKLO), a company that builds and operates nuclear power plants and is involved in nuclear fuel supply and recycling, announced a $1.5 billion at the market (ATM) equity raise a week ago, a selloff in the stock was just about inevitable.
Nuclear power has been all the rage after the Trump administration showed support, but apart from lowered guidance, there is nothing that hits a stock’s value quite like an announcement that the company will be selling more stock. Doing so dilutes the value of existing stock, while also often suggesting that the company is in dire need of cash given that equity raises are usually seen as a last resort for management.
A negative reaction to such an announcement is therefore understandable. But in reality, selling equity when a company’s stock is elevated is exactly what prudent boards and CEOs do. Giving them the ability to do so is precisely why the secondary stock market exists, so one could even argue that not doing it would be a dereliction of duty. It is even more of a no brainer for a company like Oklo, that is involved in a capital intensive business, has essentially zero incoming cash at this point, and is investing in one of the hottest industries around.
Clearly, Oklo’s management understands this. Around 20% of the company’s stock is held by insiders, so they are putting their money where their mouth is on this one. They clearly believe that the short-term negative of an equity raise is more than offset by the long-tern benefits of an expanded number of facilities, and that an ATM stock sale, with stock being sold over time rather than in one lump, should minimize the impact on the market.
As I said, a reaction to the announcement was inevitable, but why do I view this as an overreaction in the making? Well, for all the reasons above and because of simple math. $1.5 billion represents around 10% of the current market cap of OKLO, and that is after the sharp decline. However, that decline is already over 12.5%. That might not seem like too big a deal, but a 10% drop would assume that all of the stock had already hit the market, and that the incoming cash had zero utility, and neither of those things are true.
Of course, whether you see this as an opportunity or not depends on where you sit on the future of nuclear power, but an objective analysis of the economic and political situation surrounding nuclear plants can really only lead to one conclusion. For better or worse, nuclear power has a rosy looking outlook.
Economically, even if the “AI boom” turns out to be overhyped, the fact is that increasingly complex computer programs need increasingly large and powerful servers, servers which need increasingly large amounts of electricity. Even though nuclear power has shown itself to have significant risks in the past, it offers energy that can be tapped relatively quickly, with a very low carbon footprint, so is the obvious way forward.
Politically, one might have thought going in that the Trump administration would be anti-nuclear. The President has made no secret of his preference for traditional fuel sources like coal and oil, and workers in those industries voted for him in large numbers, looking for him to protect their jobs from environmental moves that threatened them. However, the need for electricity is growing so fast that Trump and his DOE believe they have to embrace some alternatives, such as nuclear power, and can do so without harming traditional energy industries.
That ensures support for nuclear power for a few years, but even if the political winds shift in 2028, that is unlikely to change. Regardless of party or persuasion, politicians will all face the same challenge: growing demand for electricity and a desire in the country to at least appear to be doing something about climate change. Nuclear power is simply the best solution to that conundrum.
A word of warning is warranted here, though. Even though OKLO already looks oversold on the news as it heads towards $90, there are two reasons not to rush in and commit all of your capital that you might allocate to buying it right away. First, it is possible that the positive reaction to the Trump administration’s stated support for nuclear power a few months ago might also have been an overreaction. Second, as I have said on many occasions, the market can stay illogical a lot longer than you can stay solvent, so it is hard to know at what point the selling will stop.
