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Utilities Top S&P 500 Amid Market Volatility: 5 Best Picks

Nalak Das

The Utilities sector is set to become the best performer of the S&P 500 Index in the third quarter of 2019. Although Wall Street is recovering impressively in 2019 after a disastrous 2018, several headwinds persist.

Utilities are a safe bet during times of market turmoil, as they are relatively stable due to the essential nature of the products they offer. Consequently, it will be prudent to invest in utility stocks with a favorable Zacks Rank to secure gains in this erratic market.

Impressive Performance by Utilities Sector in 2019

The utilities sector was the best performer of the 11 broad sectors within the benchmark S&P 500 Index in 2018 as a result of the Wall Street mayhem. Utilities gained 4.9% compared with a 6.2% loss of the S&P 500 Index. However, Wall Street recovered impressively in the beginning of 2019, notching the best-performing first quarter in three decades.

Meanwhile, market volatility started spoiling the Wall Street party intermittently in the second quarter of 2019. There after, uncertainty over the U.S.-China trade deal, global economic slowdown, inversion of government bond yield curve in August, and geopolitical disturbances like Brexit cropped up as the primary reasons for market fluctuation. And now, the initiation of an impeachment proceeding against President Donald Trump could be an added concern.

So far in the third quarter of 2019, S&P 500’s Utilities Select Sector SPDR (XLU) has gained 9.5% while the benchmark index itself rose just 2.2%. During the past six months, the utilities sector once again advanced most with a gain of 10.1% while the broad-market index advanced a little less than 5.7%.

Year to date, utilities are the third-best performer, surging 22.7%, after the technology sector (30.3%) and real estate (27.6%). Notably, the S&P 500 Index has climbed 18.8% so far in 2019.  

Utilities Immune to Vagaries of Economic Cycle    

The Utilities sector is mature and fundamentally strong as demand for such services is generally immune to the changes in the economic cycle. It's because these companies provide basic services like electricity, gas, water and telecommunications, which can never go out of demand.

Consequently, adding stocks from the utility basket usually lends more stability to a portfolio in an uncertain market condition. Moreover, the sector is known for stability and visibility of its earnings and cash flows.  Stable earnings enable utilities to pay out consistent dividends that make them more attractive to income-oriented investors.

Utility companies enjoy a reputation for being safe given the regulated nature of their business, which lend their revenues a high level of certainty. These companies also benefit from the domestic orientation of their business, which shields them from foreign currency translation issues that are lately plaguing the other industries.

Our Top Picks

Stock markets are likely to remain volatile in near future due to trade concerns, global growth woes and political issues. Consequently, investment in defensive sectors such as utilities should be fruitful.

We have narrowed down our search to five utility stocks with a Zacks Rank #1 (Strong Buy) and strong growth potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows price performance of our five picks in the past month.

NRG Energy Inc. NRG is the leading integrated power company in the United States, built on the strength of its diverse competitive electric generation portfolio and leading retail electricity platform. The company has an expected earnings growth rate of 65.1% for the current year. The Zacks Consensus Estimate for the current year has improved 1.4% over the last 60 days.

Polar Power Inc. POLA designs, manufactures, and sells direct current (DC) power systems for applications in the telecom, military, electric vehicle charging, cogeneration, distributed power, and uninterruptable power supply markets in the United States and internationally. The company has an expected earnings growth rate of 237.5% for the current year. The Zacks Consensus Estimate for the current year has improved 9.1% over the last 60 days.

National Fuel Gas Co. NFG is an integrated diversified energy company. It operates through five segments: Exploration and Production, Pipeline and Storage, Gathering, Utility, and Energy Marketing. The company has an expected earnings growth rate of 5.7% for the current year. The Zacks Consensus Estimate for the current year has improved 5.4% over the last 60 days.

AquaVenture Holdings Ltd. WAAS provides water-as-a-service solutions in North America, the Caribbean, and South America. It operates in two segments, Seven Seas Water and Quench. The company has an expected earnings growth rate of 9% for the current year. The Zacks Consensus Estimate for the current year has improved 14.5% over the last 60 days.

Consolidated Communications Holdings Inc. CNSL offers a wide range of telecommunications services including local and long distance telephone, Digital Phone, High-Speed Internet access and Digital TV to individuals and businesses in the United States. The company has an expected earnings growth rate of 83.3% for the current year. The Zacks Consensus Estimate for the current year has improved 45.5% over the last 60 days.

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Polar Power, Inc. (POLA) : Free Stock Analysis Report
NRG Energy, Inc. (NRG) : Free Stock Analysis Report
National Fuel Gas Company (NFG) : Free Stock Analysis Report
AquaVenture Holdings Ltd. (WAAS) : Free Stock Analysis Report
Consolidated Communications Holdings, Inc. (CNSL) : Free Stock Analysis Report
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