Shocking uranium play that hedge funds kept hidden

Key Points

• The energy industry is headed down one common path that will boost the need and popularity of renewable sources. 
• Hedge funds know this, and they have quietly built positions around these uranium mining names, which share another common thread. 
• Massive upside has earned them the market's love, and analysts say the math checks out for the coming rallies.

Just like many investors got around investing in Chinese names, such as Alibaba Group NYSE: BABA, after Ray Dalio got behind it, a wave of money will jump into the industry's favorite play today: uranium. 

Backing names like Cameco Corporation NYSE: CCJ and Ur-Energy Inc. NYSE: URG have tremendous upside.

Reverse engineering  

Suppose you want to dig into energy stocks and their likely path for the next few decades. In that case, there is only one sensible answer: renewables. Out of all the alternatives, solar is getting all the love and attention today, so you could assume hedge funds aren't looking there.

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That leaves another player on the table: nuclear energy. To make nuclear energy available and scalable, an ample supply and processing of uranium can make this happen.

The latest oil swings and geopolitical risks building on top of it have led some to speculate on a $150 price per barrel coming soon. As more minds get behind this idea, they will look for a cheaper alternative.

Because knowing which energy firm will become the leader in nuclear is nothing short of requiring a crystal ball, one constant must shine a light on this hypothetical name: Uranium miners. This is why so much activity has gone into mining stocks around this trend.

Upside grandeur 

Terra Capital, Segra Capital, Argonaut Capital Partners, and Anaconda Invest have one thing in common: They have quietly been building up their momentum and accumulation around the trend described previously, mainly focusing on two winning names.

When you spread out the mining sector, you can easily find it with MarketBeat's stock screener. 

The industry is trading for an average ratio of 11.0x, with an average expected earnings growth rate of 32.5% for next year. 

Starting with Cameco, the market rewards the stock with a valuation of 20.8x, which is a premium of 89% over the industry. Now, most value investors would be scared away at the prospect of investing in the most expensive name in the industry; they would be wrong to shun Cameco, though.

This company has analysts expecting an EPS boost of 288.7%, massively above the industry's expected average. There is a justifiable reason for the market and hedge funds to be willing to overpay for Cameco stock; its growth potential surrounding an unstoppable industry trend makes it a deal any day of the week.

Now, how is the smaller name of this list, Ur-Energy? It trades at a massively higher 110.1x P/E. Do the math on how much of a premium that is, and follow the thread to the promised land and why it commands such a high valuation.

The math also checks out, with analysts expecting a 150% growth rate for EPS. Considering the much higher P/E multiple, the stock could go much higher despite its growth rate being nearly half Cameco's.