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'Bricks and Mortar' Portfolio Posts Big Gains

Stocks I've highlighted as overvalued dogs remain in the "flagged" camp of the portfolio. These include Ryland, Trump (TRMP) and Home Solutions of America (HSOA), which have each fallen more than 28% since I said they should be sold.

Here's an update on all nine names in the Bricks and Mortar portfolio.

Melco (Own)

The strong opening of Las Vegas Sands' (LVS) Venetian Macau in August has investors very excited about Macau, the only region of China where gambling is legal. Melco PBL, a Macau casino developer, has enjoyed some of this spillover love, with shares surging in recent weeks. This week, Melco shares have jumped 14.6% to $18.92.

Melco also recently got a small vote of confidence from JPMorgan analyst Harry Curtis, who has been one of the major bears on the stock. Curtis says Melco should be able to meet, if not beat, his 2008 earnings estimates for the company. This is mostly because Melco is reducing its focus on the mass market to concentrate on growing the VIP segment at Crown Macau, its first casino, he said.

The Crown is the only one of Melco's casinos open today. Therefore, for valuation purposes you need to look at earnings before interest, taxes, depreciation and amortization for 2010, because that is when all three of the company's three casinos will be open.

The consensus 2010 EBITDA forecast for Melco is $775 million. To value Melco, I use a 12% discount rate, and discount that 2010 EBITDA back two years, to late 2008.

Assume a multiple of 15 times EBITDA, and the stock deserves an enterprise value of $9.27 billion. Subtract the $900 million of the net debt that analysts project for 2010, and the stock is worth $21 a share today by my estimates.

Quite frankly, I don't know what multiple Melco should trade at. But 15 times EBITDA looks reasonable in comparison to fellow Macau player Wynn Resorts (WYNN), which trades at 23 times estimated 2010 EBITDA (assuming a 10% annual discount rate).

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