Bricks and Mortar: Place Bets on Melco

Ryland Beaten Up

Among the other stocks in my portfolio, my flagging of Ryland as overvalued has proved to be my best call. The homebuilder's stock is down 19% since I first wrote about it in late January.

The ongoing subprime mortgage meltdown likely will have a spillover effect on homebuilders. Rising defaults among subprime borrowers could add more than 500,000 homes to the market, CreditSights said last week.

This flood of homes to an already large inventory of houses will put further downward pressure on pricing, which could force Ryland to record more land writedown charges.

Still, Ryland continues to trade at one of the highest price-to-book ratios among large homebuilders. The stock trades at a 32% premium to its book value, right near where fellow builder Lennar(LEN) trades. D.R. Horton(DHI), meanwhile, trades at 17% above book value. Such a wide spread is unwarranted.

Deal Talk Boosts Trump

Trump shares surged last week after reports said the company has hired Merrill Lynch to explore a sale of itself or assets. Since I first flagged Trump as overvalued, the stock is now up about 3%.

Trump has some good casinos in Atlantic City, N.J., and the company could fetch some interest. However, underlying this newfound "asset story" is the fact that Atlantic City is facing a tougher operating environment this year amid the introduction of slots parlors in neighboring Pennsylvania and New York. A recently passed, limited smoking ban in Atlantic City also is a potential revenue drag this year.

In February, slot revenue fell 10.5% at Trump Plaza, 9% at the Taj Mahal and 4% at Trump Marina, according to the New Jersey Casino Control Commission. So far this year, Trump's slot revenue is down 7% from a year ago, while total gambling revenue is down 3%.

Take away the possibility of buyout interest and Trump's stock wouldn't be rising any higher.

Bricks and Mortar Portfolio
	Rating date	Price at rating	Rating	Current price*	Return
Brookfield (BPO)	1/23/2007	$43.00	Own	41.91	-2.5%
Global R.E. ETF (RWX)	1/23/2007	$64.00	Own	66.40	3.8%
Ryland (RYL)	1/23/2007	$56.00	Flag	45.31	19.1%**
Trump (TRMP)	1/23/2007	$17.50	Flag	18.05	-3.1%**
Penn National (PENN)	2/6/2007	$45.56	Own	44.15	-3.1%
Hilton (HLT)	3/2/2007	$34.69	Own	34.35	-1.0%
Melco (MPEL)	3/13/2007	$15.46	Own	15.46	-
*3/12/07 closing price. Melco's price based on 3/13/07 open.
**Since the stock was "flagged," a drop in price is tracked as a positive for the portfolio, and a rise in price is a negative.

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