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The performance of utilities doesn’t usually fluctuate due to their traditional safe-investment appeal to investors. The regulated nature of their business gives their revenues a high level of certainty. Moreover, domestic orientation shields them from foreign currency translation headwinds.

However, the sector underperformed the S&P 500 in the first half of 2017 on concerns over rising interest rates. The industry gained 4.7% during this period compared with the S&P 500’s rally of 8.3%.

Historically, electric utilities have heavily relied on coal for a large part of power generation. This has become a big challenge for the utilities in these times of enhanced environmental awareness. However, President Trump’s decision to repeal the Clean Power Plan and walk out of the Paris Agreement will definitely provide fresh life for the coal-based electricity units.

The utility sector is capital-intensive. These companies need huge capital to set up generation facilities, and transmission and distribution infrastructure. The Federal Reserve has raised the rates twice in 2017 – in March and June. This will definitely affect the margins of the utilities.

However, with the rising interest rates reducing the value of bonds, the appeal of stable regular dividend paying utilities will entice investors.  

Q2 Performance

Going by our weekly Earnings Outlook, four out of the 16 sectors in the Zacks coverage universe are expected to witness an earnings decline for Q2. The utility sector will likely see an earnings decline of 2.7%.

How to Make a Choice

Given the plethora of players in the Utility space, picking the right stock is a daunting task. But our proprietary methodology makes it fairly simple. One can narrow down the list with the combination of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP, which is the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. It helps in picking stocks that have high chances of delivering earnings surprises in their next earnings announcement.
 
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The stocks mentioned below have a current ratio greater than 1, which means that these stocks have ample liquidity to meet its short-term obligation even with rising rates.

Applying the above strategy, we have selected four utility stocks that have a greater possibility of posting an earnings beat in the coming days.

IDACORP Inc. (IDA - Free Report)
 
IDACORP is a regulated utility and is engaged in the transmission, distribution and sale of electricity services in southern Idaho and eastern Oregon through its primary subsidiary Idaho Power Company.

The company has a Zacks Rank #2 and an Earnings ESP of +2.83%. You can see the complete list of today’s Zacks #1 Rank stocks here.  The company has a long-term earnings growth expectation of 4.50% and a dividend yield of 2.54%. It has a current ratio of 2.26 and has delivered an average positive earnings surprise of 11.36% over the trailing four quarters.

The company is expected to report second-quarter 2017 results on Aug 3.

Pattern Energy Group Inc. (PEGI - Free Report)

Pattern Energy Group operates as an independent power company and has a portfolio of 18 wind power projects. Apart from the U.S., the company operates in Chile and Canada.

Pattern Energy Group has a Zacks Rank #2 and an Earnings ESP of +23.08%. The company has a long-term earnings growth expectation of 12.00% and a dividend yield of 6.86%. It has a current ratio of 2.15 and has delivered an average positive earnings surprise of 77.28% over the trailing four quarters.

The company is expected to report second-quarter 2017 results on Aug 8.

New Jersey Resources Corporation (NJR - Free Report)

New Jersey Resources, the energy service utility, provides regulated gas distribution, and retail and wholesale energy services.

The company has a Zacks Rank #2 and an Earnings ESP of +700.0%. It has a long-term earnings growth expectation of 6.00% and a dividend yield of 2.45%. It has a current ratio of 1.08 and has delivered a positive earnings surprise of 20.0% in the first quarter.

The company is expected to report second-quarter 2017 results on Aug 2.

The AES Corporation (AES - Free Report)

The AES Corporation is a global power company and its businesses are spread across five continents in 18 countries. At the end of 2016, the company’s generation mix consisted of 34% coal, 33% gas, 27% renewable and 6% oil, diesel & pet coke.

The AES Corporation has a Zacks Rank #2 and an Earnings ESP of +20.0%. The company has a long-term earnings growth expectation of 5.00% and a dividend yield of 4.30%. It has a current ratio of 1.22.

The company is expected to report second-quarter 2017 results on Aug 8.



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