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

The builder replaces trucking concern Landstar in the list of S&P's best investment ideas

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:

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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