Nuclear Power’s Bright Outlook. Plus, Quarterly Or Semiannual Reporting?

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For 22 minutes, we had a mini sun on our plant. We had a capsule that was 10 times hotter than the core of the sun and 3 times denser than the core of the sun. It was stable for 22 minutes. So for 22 minutes, we had a mini sun on our planet. This is the idea of fusion.

Hello and welcome to the Baron Streetwise Podcast. I'm Jack Howe, and the voice you just heard, that's Haim Israel. He's the head of thematic investing at BofA Research. And did he just say we had a mini sun on our planet? For a while, for 22 minutes. I feel like that's something I should have heard about. I feel like maybe I missed an email on that one. We're going to talk about it and about the future of nuclear power. We'll also talk about the president's recent suggestion to switch from quarterly financial reporting for public companies to semiannual reporting. That topic is not quite 10 times as hot as the core of the sun, maybe 2 or 3 times. Listening in is our audio producer Alexis Moore. Hi Alexis.

Hey Jack.

Are you team quarterly or semiannual? Have you, um, have you chosen yet? Um, your friends are going to be arguing about this. It's important to take sides now and you got to start lining up your arguments.

I'm reporting agnostic, so maybe you can help me out.

Yeah, well, I did write for Barron's a recent guide to arguing over the frequency of company reporting. So you're in luck. I will tell you upfront that I think the stakes on this one are pretty low. For background, President Trump posted on Truth Social, that's his media site. He said that permitting publicly traded US companies to report financial results every 6 months instead of quarterly will, quote, save money and allow managers to focus on properly running their companies. He also wrote, did you ever hear the statement that China has a 50 to 100 year view on the management of a company, whereas we run our companies on a quarterly basis? Triple question mark. Not good. Triple exclamation. The president does raise some interesting points. Companies didn't always have formal standards for financial reporting. Most of those date to 1934 and the creation of the Securities and Exchange Commission. That was during a deep depression that was set off by a stock market crash. In 1970, when we hit bottom during another stock market rout, the SEC switched to quarterly reporting. So what happens today is that listed companies file 3 unaudited reports called 10-Q reports. Those have financial tables and there's a discussion of results by management, some key disclosures. And then once a year they file an audited and much more comprehensive report called their 10-K. This is not the president's first time calling for semiannual reporting. He did so in 2018. Back then the SEC solicited public comment, but it did nothing ultimately. Today, the SEC has a new head since April. This is someone who's known for crypto friendliness and for favoring deregulation. And now the SEC says that it's prioritizing the president's request. Since it makes the rules, maybe we'll see some action on this. So let's examine some of the arguments favored by the semiannualists. The switch could indeed be a money saver. There's a business benchmarking consultant called APQC. And they put the median cost of company financial reporting at $0.40 per $1,000 of revenue. So if you have an up-and-coming decent-sized company that's booking $100 million a year in revenue, that's $40,000. NASDAQ, the stock market company, it's on the side of the semiannualists. It makes part of its money from stock market listings, and those have plunged from more than 8,000 back in 1997 to fewer than 4,000 now. You could argue that regulation and the cost of all that quarterly financial reporting is chasing young companies away from the stock market. Maybe, but private equity seems to have a lot to do with it too. It's hard to say whether regulations are chasing companies to private equity or private equity's huge supply of growth capital is luring young companies from tapping public markets. Whichever is the case, that trend could get a big boost. Last month, the president directed the Labor Department to explore letting private equity tap 401(k) cash. If private equity gets that huge new supply of cash to put to work, maybe even fewer companies would want to come to public markets. More cash from 401(k)s would mean more money to invest in young companies, which could mean even fewer of them going public. Short-termism, that's another popular argument for the semiannual folks. If companies are obsessing over hitting their quarterly numbers, how can they possibly be investing money for the long term? I mean, just between us, they seem to do an okay job of it. Goldman Sachs found that U.S. companies plowed 37% of their cash flow over the past 5 years into research and development and capital expenditures. That compares with just 17% in Europe. So in the U.S., where companies report quarterly, long-term investing was 20 percentage points higher than in Europe, where many companies report semi-annually. But let's not get bogged down in details when we're trying to win an argument with our friends. My top tip for semi-annualists is to just use the term red tape a lot. I've never heard anyone say anything good about red tape. Frankly, even tape companies seem a little bit embarrassed by it. Okay, so that's semi-annual. How about team quarterly? I think this is an easier case to make just because you're the incumbent here. This is how we're already doing it. It's a difficult sell to say that we want to reduce investor information. Ask yourself, what would have happened with Enron if they only reported every 6 months? The answer is pretty much the same thing, but that's not the point here. Fans of quarterly reporting say that less frequent reporting could lead to information asymmetry. That's one of those vague terms that means that, uh, well-placed investors would end up knowing more than the rest of us. If I'm stickling, there's an illegal form of information asymmetry, and that would remain illegal because of something called Reg FD. Stands for fair disclosure. Companies aren't allowed to give information selectively to people or groups who might trade on it. So you keep the protections of Reg FD even if you go semi-annually. And if we're talking about a legal form of information asymmetry, I'm pretty sure that that's what the 400-year history of stock trading is based on. Each trade pretty much represents one side believing that they know more than the other side about whether it's time to buy or sell. And if we're talking about legal information asymmetries, if those were worth as much as they sound, probably wouldn't have index funds beating stock pickers as badly as they have over the years. My favorite argument in favor of quarterly reporting, and I'm going to try to say this with a straight face. Is that switching to semiannual reporting could lead to bigger earnings day surprises and thus more volatility, thereby eroding public confidence in markets. If you've been watching quarterly earnings seasons for any amount of time, you know that each quarter analysts and companies do this sultry tango, as I imagine it, where analysts gradually lower their earnings estimates to levels that companies can easily beat, and then companies leap over their targets. I picture a CEO with a rose in his mouth and a crowd cheering, "Olé!" Although that might be bullfighting. I should probably read up on tango. Anyhow, last quarter, Wall Street predicted that S&P 500 earnings would grow 4.8%, and the actual number was 12%. So if we're talking about the possibility of big earnings day surprises, I mean, how much bigger are we going to get? Now, potentially undermining the confidence of investors is no laughing matter. I want Reddit bros who are YOLOing into the latest microcap moondust miner that converted into a business model of hoarding duty coin to have full confidence in their decisions. So which side should you take here? Semi-annually or quarterly? There's a sensible compromise if you're into that sort of thing. A Brown University study concluded that a split system is best, whereby small companies would report semi-annually and the rest quarterly. Whichever side wins out, I don't think investors should expect much change. There have been a lot of studies on this subject. They've looked at reporting changes in overseas markets. The findings haven't been terribly convincing. A lot of them have been contradictory. You could compare the US with Europe, but that invites hidden variables. The US market has outperformed Europe by a lot over the long term, but is that because of quarterly reporting or is it because of a better mix of companies? But you can get a natural experiment on the subject if you focus on Europe itself, where there's a 50-50 mix of semiannual and quarterly reporters. It's been that way for about a decade. And Goldman has looked at this and found that the two groups are pretty similar in performance and popularity. Europe's quarterly reporters earn a median estimated return on equity of 14%, and they trade at 14.4 times projected earnings. The semiannual ones, they earn 15% and trade at 14.8 times earnings. In other words, both measures were within a point of each other. So choose confidently, debate fiercely, maybe invest passively. Next week, I'll tackle another societal divide, like whether a hot dog is a sandwich or whether it's okay to sleep in socks.

That's going to be a no and a no for me.

See, the flamethrowing is already starting. Let's take a quick break. When we come back, we'll look at the future of nuclear power generation and what it means for investors.

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Welcome back. We've talked about the nuclear power renaissance before on this podcast. We had the CEO of Duke a few years back talking about it. We discussed at one point a run-up in the price of uranium. It's time to talk about this again for a couple of reasons. First of all, this year, the performance of these ETFs, I mean, they're clobbering the market. The S&P 500, as I look now, has returned 14% year to date. And these nuclear ETFs, there's one here with the ticker NUKZ, N-U-K-Z, that's returned 58%. URAN, as in uranium, that's 56%. And at the top of the pack here is NLR, that is the VanEck Uranium and Nuclear ETF. That's returned about 66% year to date. At the same time, B of A Securities has just published a deep dive on nuclear energy, a nuclear energy primer. It gives a fresh look at where we are, and some of these things have really accelerated. You'll hear in a moment about small modular reactors. It looks now like those could begin to come online years earlier than previously expected. B of A expects global nuclear generation capacity to triple by 2050 with at least $3 trillion in investments. The small modular reactor market in the US alone could be worth $1 trillion. This report is filled with fun facts. Let me give you my favorite up front. Living near a nuclear power station gives the radiation exposure equal to the amount of naturally radioactive potassium in about 50 bananas. In other words, if you're worried about living near a nuclear plant, don't walk down the fruit aisle at Whole Foods. It also says that living within 50 miles of a coal-fired plant gives radiation exposure that's 33 times higher than a nuclear plant. This I did not know. The timelines for nuclear power are becoming shorter, but they're still pretty long, and it's difficult for investors to get the timing just right. There's also a lot of different kinds of players involved here—miners and millers and enrichers and reactor manufacturers and power generators and waste storage companies. So I could not tell you what's the next move for those nuclear ETFs. But I do think this is an interesting trend to keep an eye on, not least for what it means for the future price of oil. And with that, let's get to part of my conversation with Haim Israel. He's the head of thematic investing at BofA Research. What I like about this report, you know, I love a good fun fact and the report is filled with these little nuggets. It seems like a short while ago the conversation on nuclear was was how quickly we can shut it down. It was, you know, all these aging plants around the US and people would say, yes, theoretically we know that this is a clean source of power and so forth, but there's no, there's no political will out there. People don't want these things around. So nuclear is on the decline and now all of a sudden it's totally different. And I gather that this has a lot to do with AI. Can you tell me about that?

So I think there are a couple of stages over here. The first stage is understanding that energy has been weaponized since the invasion to Ukraine. Since the geopolitical trend that we've seen, we've seen that more and more countries were trying and understanding that they need to move to energy that they can produce on their own. That was the first stage. The second stage, even before AI, was that we are heading into a world of inflation. We're heading into a world of costs that are going up, which was inflated by AI. And the thinking was we need energy which is going to be per energy unit, at least is going to be quite cheap. And as you said, we are moving from a world of energy transition to a world of energy addition ever since since AI sparked into our life. And as a result, we need so much more energy. And we need this energy to meet 3 criteria. It has to be scalable, fast, it has to be independent, and it has to be cheap because we need a lot of it. And at least for an energy unit, it has to be very cheap.

There are choices here. We, we've had these large-scale fission plants in the past, and there are some new choices out there on the horizon. What shape is new-built nuclear power going to take in the US and how quickly is it going to happen?

The main one is still going to be fission. We— the executive orders are that US capacity should quadruple over the next 20 years or so, and it's going to be more and more plants which are going to be built. But to that, as you said, Jack, we're going to add SMRs, which are small modular reactors.

Describe that for people who don't know what that is. What does it look like relative to a regular nuclear power plant? And what are the advantages of these small modular reactors?

If I try to really generalize it, we are talking about the same facility, but much, much, much smaller, smaller in the size of a small house. It's run on a slightly different technology, but we are talking about the same thing, which are as big as small home. That's roughly about it. Technically, you can put it in your backyard if you're really insisting. And the advantage is it's very fast. The technology is still not there 100%, but it's very fast to build. It's very fast to roll out. It gives enough energy to power sections of cities or very small cities, very small towns. And you can deploy it very, very fast. They are very safe. And we do believe this is going to be part of the future roll-up of nuclear.

What will the growth there— how long until we start to see these small modular reactors pop up around the US?

If we would have this conversation roughly around a year ago, most estimates were talking about 2032 to 2035. Not the case anymore. Now most estimates are talking about 2028, '29 to 2030. That's probably the latest that we can see that. Of course, I'm taking out regulation, public opinion approvals. I'm just talking about the technology itself. So we are talking about anywhere between 3, 5 years the latest.

That's faster than I would have thought. We're going to get small modular reactors before we get fully self-driving cars. I wouldn't have guessed that, you know, 5, 5 years ago. So that's— that is quick. What's the increase in nuclear power generation going to look like? What's your expectation for the growth of this market?

Well, we estimate that if it's going to be fully rolled out, we can supply— and that's again, a very optimistic scenario, up to 10% of total energy needs could come from small modular reactors. The thing with those reactors is that they can supply energy needs modularly, meaning we can move them around, we can plan very differently. So those 10% that we can talk about and we can see, let's say, in 10 years' time, are actually very flexible 10%. And this is what's most important here. It's not just I'm putting one big facility. It powers what it powers. I can't move it, I can't change it, but I can address my energy needs going forward. So if I have plans that data centers will move from point A to point B, I can actually start changing the way that I plan those, start moving plants around. So this is the, the flexibility is even more important than the capacity here.

Another fact from your report, there's a shortage of nuclear energy workers. The current workforce, about 100,000. In the US, and you say it'll have to grow by an additional 375,000 workers by 2050. So people out there wondering what to study in school, maybe, maybe nuclear energy. I don't have a head for it. I can't get past E=mc². But for people out there who do, do, it sounds like a good line of work. What about the spending here for investors looking at this, wondering, you know, how much money is going to be changing hands as we go through this new cycle of building nuclear power?

Well, it depends first of all how much nuclear we're eventually going to roll out. The estimate that we've quoted in our report was saying that if we're talking about fission, we are talking about give or take around $3 trillion from here to 2050, meaning in the next 25 years, another trillion if we are talking about SMRs. So we already without getting to $4 trillion altogether worldwide estimate. And the big of course question is when we're going to go from fission to fusion. Now we are focusing on the United States, which is to some extent not the big picture over here. US is, as I said, they are aiming to quadruple nuclear plants. Same thing, we are starting to see that in Europe, but the big gorilla in the room is definitely China. China is now producing or adding electricity capacity which is worth the entire US grid every 18 months. And big part of it is coming from nuclear. Of course, we have hydro, we have renewables, we have other forms of energy as well. But nuclear is going to be a big part. And by 2030, which, you know, 5 years from today, actually China could run a fleet that could be bigger than the US fleet, the nuclear fleet. So those, when I talk about give or take $4 trillion, it's not going to be all in the United States. Big part of it is going to come in China.

Explain fusion for people who don't have a background in this stuff. What's the big deal? I gather that it's the holy grail of nuclear power generation. What makes it so special? What's it going to do for us and what's stopping us from getting there?

I'll try to simplify it as much as we can. And as I said, yes, this is the holy grail because actually the materials that you need, the raw materials, it's water. That's roughly about it. So the discussion around the radiation, about all the risk of nuclear is very different. Today we are talking about fission. Basically, we are taking very heavy elements and we crack them down, and we create by those cracking down more energy that creates some kind of a chain reaction which creates more energy. Then fusion is exactly the opposite of this process. We're taking the lightest elements that we have on the planet, basically hydrogen, and we are merging 2 atoms of hydrogen into helium. So this merge creates a lot of energy. This is exactly the process that is now being created in the sun. That's how the sun works. The sun is so powerful and what it does, the pressure is so big, the energy is so big that actually hydrogen atoms are merged into helium and this merger creates a lot of energy. You need a lot of energy for this process, so it's net loss. You actually invest more energy for this fusion process than the energy that comes out.

Somewhere in here was a delicious fun fact. I can't find it right now, but it was like you need heat equal to 20 suns or something like this to create fusion. Am I, am I right about that or close?

Under the current conditions, you are right. And this is when we are talking about the Holy Grail is how we are changing this this technology that will actually invest less energy, sustain it, and this will create some kind of a nuclear process that will create more energy on its own all the time. So basically, if you really want to simplify it and give the anecdote about that, we are trying to create a mini sun.

I've seen a lot of Marvel movies and I'm pretty sure this is how superheroes are, are born or villains sometimes. This is the origin story. There was an experiment, uh, and it got out of hand. But it sounds like there was a while where nuclear fusion was discussed as, you know, we don't know if it's ever going to be possible, if it's ever going to be viable. Are people starting to come around to the view that not only is it going to be possible and viable, but we can start to think of a timeline when we're going to use power that's generated through fusion? Are we at that point yet?

It was definitely at that point now. Technology is still away from us. We still didn't get to this moment that we have it and we can commercialize it. But the timelines got shorter. The feasibility is definitely there. Those experiments that I've explained are showing us that this can be done. It's a net positive. More and more money is now being turned into fusion and the timelines are getting shorter and shorter. So the joke with fusion for the last 30 years, it's 30 years away. That was always a joke. So not anymore. Now we are talking about the next 10 years is where we have plasma sustainable capsules and all this stuff. And probably a couple of years after that, no later than that, we'll have it fully commercialized. By the way, some estimates that I've seen recently are talking about even a shorter timeline than that. And by the way, we have to thank AI for those developments that we've seen. The biggest challenge that we faced in when it comes to fusion was the amount of calculations. You want to mimic the Sun, you need ridiculous amount of calculations to be done. How do I control the plasma? How do I control this process of fusion of hydrogen atoms? It requires amount of calculations the amount of computers on the planet just could not sustain. AI allowed us for the first time to do the calculations in a much more efficient way. And this is what made everything possible. This is what's creating or shortening the tunnel right now.

I'm thinking here for investors, this has got to be the most difficult part of what you do, because on one hand you can see this is a massive undertaking. There's going to be a lot of money spent. There will be money to be made by investors, but we're talking about a timeline that makes it difficult for an investor to say, are there opportunities today? Is it too early? Do I have to wait 5 years to get in? What? What do you say about that for somebody wondering, is it too early to be invested here today? And if they are to invest here today, where should they be looking? Sure.

So our, our approach have changed a lot because of that. And, and I completely agree, this is always the dilemma for investors. In December 2022, we all woke up to a day that the world have changed. ChatGPT that was launched 2 and a half years after that, we can definitely say the world have changed. But we spend a lot of time and efforts, most of us, trying to understand for the first 6 months what it is, What's going on here? Why the market are reacting like they are reacting, like specific companies are reacting like they are reacting. And up until today, we don't really understand what will be the future applications. Our view, we need to be on top of those moonshots. We need to be on top of those technologies because they are happening. The timelines are getting shorter and shorter, and you don't want to wake up to this ChatGPT moment again. So we are talking about quantum computing, which is a technology which we believe is gonna commercialize probably in the next 5 to 6 years as well. And completely can change the world. Nuclear fusion, definitely investor need to be on top of it. Investor don't need to wait, say, oh, that's long-term away. I don't need to worry about it. You just need to do the work right now because these timelines are getting shorter and shorter. Technology is developing so fast that those ChatGPT moments, those eureka moments can happen overnight without any warning. So we need to be ready. Breakthroughs are coming. And we need to understand that just no long-term and short-term anymore. It's all short-term and we need to be on top of it.

Does your group have recommendations for where investors ought to be looking here? I mean, there, there are a lot of choices. There are a lot of different kinds of companies that will be involved. Is one part of the market more promising than the other for investment?

Yeah, so we are— I'm not gonna go into specific names, of course, but we are now, we are this buildup phase of fission. SMRs, and then long-term fusion. You need to look at equipment, you need to look at buildouts, you need to look at infrastructure, and you need to look at materials. Because one of the biggest stumbling blocks over here is the raw materials. In fusion, it's very easy. We'll take a glass of water. That's roughly about it. It's not a problem at all. By the way, if the entire planet will move to fusion to power our world every day, we need 6 bottles of water. That's what we need. Today we're using 110 million barrels of oil every day. So we can they move to six packs of water. But with fission and with SMRs, you need uranium, you need plutonium, you need stuff that is scarce, expensive, a lot of geopolitical concerns about it, a lot of governments which are involved in that security issue, national security. So those are all also areas which we are seeing structural scarcity at the moment and, and quite complicated. Could be very interesting for investors.

Is there anything that I've neglected to ask you on this subject that you want to add? I know there's loads more to talk about here and we're only scratching the surface, but, um, anything that you want to add here you think is important for investors to know?

I think that investors don't understand the world that we're heading into in terms of how much energy will we need. Our projections are saying that we will need, give or take, 50% more data centers in the world by, in the next, give or take, 10 years or so. And we're talking about huge data centers. Now, if we'll build all these data centers, the data centers could consume more energy than Japan, just the data centers. And by the way, I already saw some estimate that told me that if we'll really build what we need, the data centers themselves will consume more energy than India. We need more energy resources. We need it a lot. And nuclear is definitely going to be the way. So the world is reversing and investing quite a lot in that. Interestingly enough, our thinking here is that yes, we are heading into a world of addition, but it doesn't necessarily mean that we're going to go to a world of fossil. You need energy which is going to be cheap, scalable, and independent. It's not necessarily going to be oil. It's going to be definitely nuclear. Nuclear is going to be a big part of it. It's going to be renewables, which today per energy unit are cheaper, could be more scalable. In the future, we are talking about hydrogen energy as well. It's not cheap today. The technology is not there today. But it will be, and prices are coming down. So we actually see so much more growth in other sources of energy, although we will need more energy, that we still hold to our guns that in the next 5 to 7 years we are reaching peak oil demand, even though that we need more energy.

Peak oil demand in the next 5 to 7 years. And we haven't talked about other sources of clean energy, but are you similarly bullish, or do you have a similar growth outlook for, you know, wind and solar and these other forms of energy? You think they're all going to kind of grow side by side, or you think that nuclear is going to outpace these other forms?

Nuclear is outpacing in terms of energy generation. But what we are seeing that the most scalable fast now is actually renewables. And the price of energy are coming down very fast is actually with renewables. Did you know that for the last— I think it was last 2 years, the total additional energy that was added in the US, 80 was renewable energy estimated. By the way, it's now to be 85 to 87%. So the extra energy that is coming because it's fast to deploy, because it's cheap, because technology is improving very fast over there, is actually going to be renewable. So I'm not talking about environmental issues, I'm talking about economic issues.

What's fascinating about this is, let me see if I can put this the right way. A short while ago, the conversation about renewable or clean energy was about doing good. It wasn't just about, you know, money or, or availability. It was about we need to watch out for carbon generation and global warming and all these things. The conversations I hear today, these do not sound like tree-hugging conversations. These do not sound like do-gooders. These sound like people who say we have a desperate need for energy. We have to put it together as quickly as we can. And these are just the most viable ways to go about doing it. Is that your sense?

The part that was missing up until now was this, this, the economics are working and the geopolitical incentives are there. Countries, as I said, do not want to increase import of energy. 83% of the plant is import energy and not exporting energy, and countries don't want to increase that. So when those three stars align, the economics, the geopolitical, the demand, that actually supports the environmental argument. And those stars that are aligning right now is what was missing in the equation up until now.

Thank you, Haim, and thank you all for listening. Alexis, what do you think? We covered the basics. I wanted to ask about, um, the banana fact, about that radioactive potassium in bananas and whether it applies to tomatoes, because we've got quite a few sitting in the, uh, you know, it's kind late season tomatoes sitting in the kitchen time of year. I'm just surrounded by them and I'm wondering if I'm safe. I gotta check if Tractor Supply sells Geiger counters. Alexis Moore is our producer. If you have a question you'd like played and answered on the podcast, send it in. It could be in a future episode. Just use a voice memo app on your phone, send it to jack.hough@barons.com. See you next week.

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.