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How Implied Volatility, Short Interest Are Affecting Utilities

PART:
1 2 3
Part 2
How Implied Volatility, Short Interest Are Affecting Utilities PART 2 OF 3

Utility Stocks: Is Low Volatility Outperforming High?

Utility stocks with high implied volatilities

NRG Energy (NRG) had risen 32.4% in the past year as of March 15, 2017. It had the highest implied volatility of all the utility companies that make up the Utilities Select Sector SPDR ETF (XLU).

Utility Stocks: Is Low Volatility Outperforming High?

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In the past five days, NRG Energy has risen 1.7%, while XLU has risen 2.4%, and the S&P 500 Index (SPY) (QQQ) (SPX-INDEX) has risen 1%. The Dow Jones Industrial Average (DIA) (DJIA-INDEX) has risen 0.5% over the same period.

The chart above shows the one-year and trailing-five-day returns of the stocks we identified in the previous article as having high and low implied volatilities. It shows how high volatility stocks have generally moved more sharply than low volatility stocks in the past year.

However, low volatility stocks have outperformed their high volatility counterparts over the last five days. This outperformance could reflect the ability of larger and stronger low volatility companies to outperform in a rising interest rate environment.

Among the high implied volatility stocks, CenterPoint Energy (CNP) has risen the most in the last five days, while Scana (SCG) has risen the least. CenterPoint has also risen the most in the past year among our high implied volatility utility stocks. Its revenue has risen 16.2%, and its operating income has risen 7.5%. Its operating profit margin is 12.3%.

FirstEnergy (FE) has been the only loser in the past year among high implied volatility utilities. In the last four quarters, its revenue has fallen 4.7%, while its adjusted operating profit has fallen 15.2%. Its operating profit margin is 17.5%.

Returns of utility stocks with low implied volatilities

Dominion Resources (D) has risen the most in the last five days and the past year among low implied volatility utility stocks. On February 1, 2017, it announced its 4Q16 earnings, reporting earnings per share of $0.73.

In the next part of this series, we’ll look at the utility stocks with the highest short interest-to-equity float ratios. High short interest in a stock can cause its implied volatility to rise.

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