Ensco and MDC: Set to Shine?

08/27/2013 8:00 am EST

Focus: STOCKS

John Buckingham

Editor, The Prudent Speculator

For those looking to commit new money to equities, we might focus instead on recent laggards; I'd rather buy the stocks that have yet to have their day in the sun, says value investor John Buckingham in The Prudent Speculator.

Dividend-payers historically have delivered the best long-term returns, with capital gains accounting for the lion's share of the performance. What's more, dividend-payers historically have been less volatile than non-dividend payers.

And, in the first year of the Presidential Cycle (the weakest of the four, going all the way back to 1927), dividend payers have really earned their stripes, returning 7%+ on average, compared to 3% or so for non-dividend payers.

Ensco PLC (ESV) is the world's second largest offshore driller. The firm operates across six continents with one of the newest jackup and deepwater fleets in the contract drilling industry.

In its last few earnings releases, ESV has shown a relatively impressive ability to keep operating expenses in check and generate solid free cash flow.

We believe that the outlook for deepwater drilling remains attractive, and Ensco is well positioned to benefit, as new builds come online and it realizes favorable contract rollovers.

ESV has a solid balance sheet and future cash use should provide another near-term catalyst, coming in the form of additional rig capacity, debt reduction, or share buybacks and dividend increases. ESV shares trade for 9 times forward earnings estimates and offer a 3.4% dividend yield.

MDC Holdings (MDC) is a builder and seller of homes in California, Colorado, Maryland, Virginia, Arizona, and Nevada under the name Richmond American Homes, and an originator of mortgage loans for home buyers.

We believe that the company is well positioned with a strong backlog, a broad geographic footprint, solid net-new-order momentum and improved gross margins.

Though interest rates have ticked up, the historically low environment should continue to help the company sell to customers that have been sitting on the sidelines, waiting for the economic picture to improve.

While there might be some lingering uncertainty for buyers in the near term, we like that the company has continued to actively acquire land in attractive markets across the country. MDC boasts a solid balance sheet and a healthy 3.4% dividend yield.

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