Value Expert Eyes Energy

05/22/2014 7:00 am EST

Focus: STOCKS

Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

We are seeing further evidence that investors are moving out of overpriced growth stocks into reasonably priced value stocks; you should, too, says J. Royden Ward, editor of Cabot Benjamin Graham Value Investor.

Our latest stock picks are a good mix of low and medium risk stocks found in a wide variety of industries. All of the stocks are undervalued, yet ready to produce exceptional sales and earnings growth during the next 12 to 24 months. Included on our buy list are two oil and gas drilling plays.

Ensco (ESV)

Ensco, based in London, is a leading offshore oil and natural gas driller with shallow water and ultra-deepwater rigs located in many parts of the world.

As a result of high lease rates to customers and high utilization of its rigs, sales and earnings will likely show strong growth during the remainder of 2014. Pride continues to kick in extra profits, too.

Meanwhile, many other oil drillers are experiencing slow demand and little profit growth during the first half of 2014. Demand for most drillers will start to pick up in the second half, though.

ESV reported solid first-quarter sales and earnings results and raised the dividend recently. The shares sell at 8.1 times latest 12-month EPS with a dividend yield of 5.8%.

The two primary criteria for selecting Classic Value stocks are a low price to book value (P/BV) and a low price to earnings (P/E). ESV's current P/BV of 0.94 provides further evidence that the stock is clearly undervalued.

I expect ESV to reach its minimum sell target price of $82.60 within one year. Buy at the current price.

Noble (NE)

Noble, founded in 1921 and now based in Switzerland, is one of the world’s leading offshore drilling contractors. The company currently operates a fleet of 77 offshore drilling rigs.

Noble is focused on increasing the number of deepwater offshore drilling rigs in its fleet to spur growth and take advantage of strong demand. In recent months, the permitting process in the US Gulf of Mexico has improved, allowing more deepwater drilling units to operate in the Gulf.

Sales rose 21% and EPS soared 59% in the 12 months ended March 31, 2014. Noble took delivery of five new rigs during the past six months and will take delivery of two more in the current quarter. The added capacity will help boost revenues by 18% and EPS by 22% to 4.22 during the next 12 months.

At 8.9 times current EPS and with an attractive dividend yield of 4.9%, NE is clearly undervalued. In addition, its P/BV ratio is a low 0.89. NE will likely rise to its minimum sell target price of $54.79 within two years. Buy at the current price.

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