By Paul Price of Market Shadows
Yesterday's write up and purchase of Diamond Offshore (DO) solicited two comments from readers asking me to check out Ensco plc (ESV), another offshore drilling industry player. I did and it looked like a terrific idea.
Ensco earned $6.07 in 2013. At today’s price of $50.84 the trailing P/E is just 8.4x. The recently increased, 75-cent quarterly dividend, provides a generous and well-covered 5.9% current yield.
Market Shadows added 88 shares of ESV to our Virtual Value Portfolio at $50.84 today. We also sold 2 contracts of ESV’s Jan. 2016, $55 puts @ $11.40 per share for our Virtual Put Writing Portfolio .
The shares give us unlimited upside on a stock that peaked at $83.20 back in 2008. The stock touched $65.80 early in 2013 when EPS were just $5.23. Zacks sees 2014 profits coming in at $6.41 and then rising to $7.14 in 2015.
Our put selling venture commits us to buying 200 shares of ESV at a net cost of $43.60, if the puts are exercised ($55 strike price – $11.40 put premium). That entry point would be very close to the exact bottom since July of 2012. Maximum profit on this option transaction is limited to 100% of the premium received or $2,280.
