In the fourth quarter of 2017, U.S. GDP growth fell to 2.6% from the 3.2% growth that was achieved in the third quarter. Also, the unemployment rate remained static at 4.1%, the lowest in the last decade. The low unemployment level resulted in increased spending power and a rise in imports, which is partly responsible for the lower GDP growth.

The trend of growing stock indexes continued in the fourth quarter, but the utility sector failed to see similar growth levels; the S&P 500 gained 23.7% over the past year while the utility sector only rose by 4.5%.

Growth in the utility sector is presently lower than the GDP growth rate. Per the U.S. Energy Information Administration, reasons behind this trend include slowing population growth, market saturation of major electricity-using appliances, improving the efficiency of equipment and a shift in the economy toward a less energy-intensive industry.

The harsh winter weather that started during the Christmas Eve last year should show a positive impact on performance of the utilities. Utility companies need large amounts of capital to set up generation facilities, transmission and distribution infrastructure to perform during harsh climatic conditions and to combat hurricanes that affect their service territories. Upgrading and maintaining the existing infrastructure of natural gas and water service providers also involve a huge capital investment.

These capital-intensive utilities therefore routinely take recourse to capital markets to meet the requirements as internally generated funds are not sufficient. The Fed’s interest rate hikes in four of the last five quarters will certainly hurt utilities.

Having said that, investing in utilities is a safe bet due to the regulated nature of their business that gives their revenues a high level of certainty. Moreover, domestic orientation shields them from foreign currency translation headwinds. Utilities are also a preferred choice for income oriented investors as these increase shareholder value with regular dividend payments and share buybacks.

How Utility Sector is Poised

The Zacks Utility sector is currently placed at the bottom of the 16 Zacks sectors.

According to the latest Earnings Trends report, the sector is expected to record top and bottom-line growth of 1.3% and 5.5%, respectively, compared with of 7.6% and 11.9% for the S&P 500 in the fourth quarter.

Selecting the Right Utilities for the Season

The entire utility sector includes companies from electric power, natural gas, water, wireline and electric construction industries. So it could become a daunting task for investors to select the right stocks from so many options.

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.

This method helps in selecting stocks that have high chances of delivering earnings surprises in their upcoming earnings announcements. 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.

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

Our Selection

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

Exelon Corporation (EXC - Free Report) has a presence in every stage of the energy business — power generation, competitive energy sales, and transmission and delivery. The company serves nearly 10 million customers in its service territories. Exelon is scheduled to release its fourth-quarter earnings on Feb 7.

The company has a Zacks Rank #2 and Earnings ESP of +0.88%. It has a current ratio of 1.03. You can see the complete list of today’s Zacks #1 Rank stocks here.

It delivered an average positive earnings surprise of 1.76% in the last four quarters and has a long-term (three-five years) earnings growth rate of 4.33%.

ONE Gas, Inc. (OGS - Free Report) is a regulated natural gas distribution utility company in the United States. The company along with its subsidiaries distributes natural gas to nearly 2 million customers. ONE Gas is scheduled to release its fourth-quarter earnings on Feb 21.

The company has a Zacks Rank #3 and Earnings ESP of +0.30%. It has a current ratio of 1.14.

It delivered an average positive earnings surprise of 7.47% in the last four quarters and has a long-term (three-five years) earnings growth rate of 5.80%.

Clean Energy Fuels Corp. (CLNE - Free Report) provides natural gas as an alternative fuel for vehicle fleets in the United States and Canada. It is scheduled to release its fourth-quarter earnings on Mar 6.

The company has a Zacks Rank #3 and Earnings ESP of +14.29%. It has a current ratio of 3.52.

It pulled off an average positive earnings surprise of 26.98% in the last four quarters and has a long-term (three-five years) earnings growth rate of 15.0%.

Westar Energy Inc. (WR - Free Report) generates, transmits, and distributes electricity in Kansas. The company is scheduled to release its fourth-quarter earnings on Feb 28.

The company has a Zacks Rank #3 and Earnings ESP of +4.24%.

It has a current ratio of 1.07. It has a long-term (three-five years) earnings growth rate of 3.39%.