Why CenterPoint Energy (CNP) Could Be a Triple Threat in Favor of the Bulls

Generally speaking, utility firms like CenterPoint Energy (CNP) don’t exactly get the heart rate pumping. While vital to broader infrastructural considerations, assets like CNP stock tend to be boring. However, with the benchmark equity indices again printing disappointing performance stats recently, now might be a good time to consider adding CenterPoint to your portfolio.

Fundamentally, the enterprise – which specializes in electric and natural gas services in select markets – benefits from a natural monopoly. Essentially, would-be competitors don’t even bother due to the steep barriers to entry. As well, utility firms tend to be entrenched. Just from the regulatory barriers alone – obtaining the necessary licenses and permits – can be incredibly lengthy, costly and complex.

In addition, companies like CenterPoint enjoy a predictable business model. To be sure, the utility doesn’t offer particularly sterling financials. However, aside from a hiccup in 2015 and 2020, CenterPoint has been profitable on an annual basis. Plus, it posted positive operating income during the aforementioned years.

Lastly, from a topical perspective, CNK stock provides passive income. It’s not the most generous yield out there at 2.74%. However, with a reliable industry and a low 60-month beta of 0.89, CenterPoint offers a reasonable idea during times of uncertainty. What’s more, it could be a “triple threat” in favor of the bulls.

Solid Analyst Support for CNP Stock

First off, CNP stock commands solid analyst support. Right now, shares carry a moderate buy consensus view. This assessment breaks down as five strong buys, two moderate buys and four holds. Significantly, no expert has issued a sell rating.

What’s more, the mean price target calls for CNP stock reaching $31.50. Other sources round this figure up to $32. Either way, we’re looking at a double-digit lift from Thursday’s closing price of $27.95. Also, the high-side price target stands at $34, implying nearly 22% growth potential.

Options Movement Favors CNP

Turning to the derivatives market, CNP stock options overall incurred fading implied volatility (IV) from the Aug. 1 session to Sept. 1. Since then, however, IV has picked up conspicuously, which on one hand appears to have created a volatility premium. As a result, some traders have been incentivized to sell options contracts (more on that later).

On a broader level, though, CNP’s volatility smile – or IV plotted at various strike prices – appears to show a skew toward the bullish end of the sentiment spectrum:

At $27, IV for CNP stock options sits at its lowest point at 0.16. From here (and from the perspective of a call option holder), IV moves at a similar “velocity,” whether to the deep in the money (ITM) direction (i.e. to the left) or far out the money (OTM) direction (to the right).

That said, a higher rate of velocity is achieved for the OTM direction between the strike prices $27 to $39 (at a rate of 0.0717 IV per $1 increase in the strike price). In contrast, the ITM direction moves at a velocity of 0.0686 IV per $1 decrease in the strike.

Overall, it’s possible that while traders are accounting for and mitigating downside risk, many of them have a higher expectation of a price swing northward. If so, such a belief aligns with Wall Street analysts’ sentiments.

Institutional Traders Bet Big on CenterPoint

While it’s always useful to track the action in the derivatives market, what the institutional traders do with their money often carries the most weight. After all, these entities help move the market. And their recent activity may have tipped their hand regarding their anticipated outcome for CNP stock.

For starters, CNP represented a top highlight in Barchart’s screener for unusual stock options volume. Specifically, total volume reached 4,106 contracts against open interest of 11,054. Further, the delta between the Thursday session volume and the trailing one-month average metric came out to 1,009.73%.

Interestingly, the transactional breakdown shows that call volume only mustered 40 contracts while put volume hit 4,066 contracts. At face value, such a backdrop might seem ominous because puts generally represent a bearish wager. However, that’s true when acquiring puts. When you sell puts, the implied rationale moves in the opposite direction.

And that’s where Fintel’s screener for options flow – which filters for big block trades likely made by institutions is so enticing. During the Thursday session, traders sold (wrote) 4,000 $30 puts with an expiration date of Jan. 19, 2024. Therefore, the entities involved believe that CNP stock will trade around $30 and hopefully higher, allowing them to collect maximum premiums – premiums that have gotten richer due to the aforementioned higher IV.

Boring But Viable

Ultimately, the takeaway for CNP stock is that it’s boring but viable. First, you have analysts supporting a rising share price. Second, the volatility smile tilts favorably for bullish options traders. And third, the institutional players are selling puts, taking advantage of the heightened IV but in a manner that implies optimism for CenterPoint. While all investments carry risks, this might be as close to a no-brainer as you can get.

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On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.