Cameco falls below $30, down 25%, as investors react to Japanese crisis.

Uranium stocks have sold off dramatically as the nuclear tragedy in Japan continues to unfold. It's as if investors around the globe believe that every country in the world is going to shut down their reactors tomorrow for fear that a similar disaster will strike them.

That's nonsense, of course. But occasionally the markets allow panic to overcome common sense and this is one of those times. Yes, the situation is Japan is frightening. But the ultimate outcome is not going to be a halt to the construction of new reactors - we need them - but rather the introduction of even more stringent safeguards to protect the facilities against the unthinkable.

One of the stocks that has been especially hard-hit is Cameco (NYSE: CCJ, TSX: CCO), the world's largest uranium producer. The shares were trading in Toronto at mid-day Tuesday at $29.77, down almost $10 from their price on March 4.

The company, which is based in Saskatoon, Saskatchewan, held a conference call on Monday during which management said it does not expect the Japanese crisis to have any direct impact on its business, either short ot long-term. The 2011 guidance of uranium sales of between 31 and 33 million pounds and revenue growth of 15%-20% was reiterated.

Following the call, RBC Capital Markets issued an updated analysis in which the brokerage firm emphasized Cameco's strong balance sheet and noted that the company is starting to generate free cash flow that will support long-term growth.

"Cameco's sales contract portfolio, 40% of which is comprised of contracts with base-escalated prices, will provide some protection for Cameco's earnings and cash flows in the face of falling uranium prices," RBC said.

The firm maintained its "outperform" rating on the stock.

Before the Japan disaster hit, Cameco released fourth-quarter and year-end results that beat analysts expectations and appeared to set the stage for strong growth going forward  this despite the fact that both revenue and earnings were down year-over-year.

The company reported revenue of $2.1 billion for the full year, down 8% from $2.3 billion in 2009 (figures in Canadian currency). Net earnings were $515 million ($1.30 per share, fully diluted) compared to $1.1 billion ($2.82 per share) in the previous year. However, the 2009 figures were inflated by a one-time gain on the sale of Camecos interest in Canterra Gold and other factors. On an adjusted basis, 2010 earnings per share came in at $1.25 a share compared to $1.35 in 2009.

"Cameco had an excellent year in 2010," said CEO Jerry Grandey. "We increased production, lowered uranium unit costs, and substantially raised our dividend. We also achieved the best safety record in our history.

"The market ended the year very strongly, as China signed significant long-term uranium purchasing agreements and several countries indicated their intentions to build more nuclear reactors. Our company is well-positioned to prosper from the growing need for clean energy now and in the future. We remain committed to our strategy of doubling production to 40 million pounds by 2018."

The company said it continues to make progress on its troubled Cigar Lake mine, which is sitting on one of the richest uranium deposits in the country. The mine has been plagued by flooding and other problems but Cameco says it is on track to begin production in mid-2013.

The stock hit a three-year high of $43.59 on Feb. 14 before pulling back to its current level.

The bottom line is that Cameco controls a large quantity of one of the world's most valuable resources and is in good financial shape, but the stock has plunged in response to a very serious natural disaster and its impact on three Japanese nuclear reactors.

There could be more downside here - once panic selling takes hold, it is impossible to predict where it will end. So we advise readers of our newsletters who have already taken positions to hold on to them and wait. Never sell into a situation like this.

Those who do not own Cameco should watch the stock over the next few days and be prepared to start accumulating some shares if the price continues to fall. A good target entry point is around $28, although if the markets have any sense at all it won't get that low.