For many investors, notably the non-swingers, it’s not the lure of the next hot stock that counts, but the stability of their utility stocks and their dividends. One of them is retired piano player Walter Hauser, who recently emailed me, “Dan, with interest rates going up, I’m worried about my utility stocks. Do I have much to worry about?”

Answer: I don’t know which utility stocks you’re referring to, but the answer regarding the utility sector itself is yes. You should be concerned, but wait; you could see a happier scenario this time out.

The bad news: Utilities, which are heavy borrowers, usually perform poorly in periods of rising rates as their costs of money go up. According to Merrill Lynch, the group, dating back to 1970, has underperformed the market in seven of the 10 periods when long-term rates have risen more than 100 basis points.

Further, as far as long-term rates go, the handwriting seems to be on the wall, and it’s not pleasant. For example, long-term bond yields have already succumbed to the Federal Reserve’s credit-tightening cycle, rising to 4.6% from 4.2% at the beginning of 2004. Further, inflationary fears are flaming expectations that bond yields could rise further, observes Merrill’s utilities tracker, Steven Fleishman.

Still, electric utilities, despite a slew of rate hikes – seven since June – have been on a tear the past 12 months, ballooning 19.4%, more than four-fold the 4.8% gain in the S&P 500 in the same period. Obviously, a lot of investors have opted for safety and above-average dividend yields in an uncertain market environment.

So why the possibility of a happier utility scenario this time out during rising rates? For one thing, better growth, observes Mr. Fleishman, who sees a number of reasons why the utility sector is better positioned to hold up in a rising rate environment than in the past.

For starters, he projects 10% earnings per-share growth for the utility industry this year, which would be the highest level in many years and above the expected growth rate for the S&P 500. Much of this earnings growth is seen coming from tax relief already granted in 2004, as well as cost management, finance savings, customer growth, and share repurchases. Mr. Fleishman also sees continuing 2006/2007 earnings growth of 5%, driven by rate-base growth in both regulated and non-regulated businesses.

Further, dividend growth, he notes, is expected to top 5% this year, the highest level in 15 years. Higher interest rates, Mr. Fleishman points out, should have little or no impact on this growth, given improved balance sheets with limited floating rate debt and solid cash flow.

Yet another plus: A number of utilities have also become back-door energy plays. In brief, companies with large non-regulated nuclear and coal generation are selling into a power market that has been driven up by rising natural gas prices, creating expanding margin potential. In other words, these companies could see better earnings in an environment of high interest rates, high inflation, and high energy prices.

A bull on the sector, the analyst believes any major correction in utilities stemming from a spike in interest rates would represent a buying opportunity, especially in companies with better growth profiles and some upside energy sensitivity. In this context, he particularly favors TXU ($81.86) and Constellation Energy ($53.45).

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A KNOCK AT MOM: “It may sound blasphemous,” says money manager Stephen Leeb of Leeb Capital Management, “but we’re shorting a stock called Mothers Work” (a bet its price will fall), a designer and retailer of maternity clothes that operates stores under the brand names of Motherhood Maternity, Mimi Maternity and A Pea in the Pod. Although the stock has already plunged nearly 50% from its 52-week high of $27.57 to its current price of $13.26, Mr. Leeb believes there is further downside to below $10.

Why so? Because he feels the shares are currently priced as if the company were a primary retailer with high growth potential, even though its net income is stagnating.

Mr. Leeb further notes the return on equity and profit margins are low by industry standards, while the debt load is extremely high. Likewise, Moody’s recently lowered its rating on the company’s senior debt, based on its belief that competition in the maternity apparel market and increased costs will prevent a turnaround in the company’s financial performance over the near term. Also, same-store sales continue to fall and the share price has followed suit.