Markets & Finance

MDC's New Home: the S&P Top Ten


By Kenneth Shea, Robert Gold, and Steve Biggar On July 14, Standard & Poor's Equity Research Group made changes to the S&P Top Ten portfolio -- those stocks it considers to be the best candidates for capital gains over the next 6 to 12 months. We at S&P added homebuilder MDC Holdings (MDC) to the portfolio, replacing trucking concern Landstar System (LSTR

.

Like all the stocks in the portfolio, MDC carries Standard & Poor's highest investment ranking of 5 STARS (strong buy). Landstar retains its 5 STARS ranking following its following its solid second-quarter earnings report on July 14.

MDC ranks among the largest homebuilders in the U.S. Its subsidiaries build homes under the name Richmond American Homes. The company also provides mortgage financing through its

HomeAmerican unit. Our continued bullishness on the stock reflects our positive view of the company's strong earnings momentum and expanding geographic footprint in rapid-growth regions.

Given the favorable fundamental backdrop for the homebuilder group, we think the stock's valuation remains compelling at just 7 times our 2006 operating earnings per share estimate of $12.50 -- a steep discount to the multiple for the S&P 500 index. By applying the average multiple of its peer group -- 8.8 times -- to our 2006 EPS estimate, our 12-month target price on MDC is $110.

The S&P Top Ten portfolio was launched on Dec. 31, 2001. From inception through June 30, 2005, it has gained 21.4%, compared to a 10.3% climb for the S&P 500 index on a total return basis. For all of 2004, the S&P Top Ten rose 19.2%, vs. a gain of 10.9% for the S&P 500 (total return). Year-to-date through June 30, 2005, the portfolio advanced 0.7%, while the S&P 500 declined 0.8%.

Here's the S&P Top Ten list as of the close of trading July 14, 2005:

S&P TOP TEN PORTFOLIO

Company

Ticker

Price (7/14/05 close)

12-Month Target

Investment Rationale

Burlington Northern

BNI

48.96

65

Strong market share, rising shipping volume

Covance

CVD

48.75

61

Attractive valuation

Guitar Centers

GTRC

58.86

75

Attractive valuation

Ingersoll-Rand

IR

74.66

100

Expected improvements in several end-markets

International Speedway

ISCA

59.00

68

Dominant position with NASCAR

Lennar

LEN

65.95

76

Attractive valuation

MDC Holdings

MDC

87.96

110

Projections for higher EPS and gross margin

St. Jude Medical

STJ

43.10

55

Positive ICD market data

Smith International

SII

65.13

80

Attractive valuation

Spectrum Brands

SPC

38.25

50

Strong earnings outlook

Shea is director of global equity research, and Gold and Biggar are senior portfolio group analysts, for Standard & Poor's Equity Research


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