Beware of Drowning in Standard Pacific

Editor's note: "Bricks and Mortar" is a mock portfolio created by reporter Nicholas Yulico that is meant to help generate real estate and gaming-related stock ideas. In keeping with TSC's editorial policy, Yulico doesn't own or short individual stocks.

With the housing market still crumbling, there is a decent chance that some homebuilders are going to go bankrupt over the next year.

That means if you're eyeing homebuilder stocks, you have to be looking at the companies' debt loads and the cash flows. And in these areas, there's one builder that looks like it's heading for trouble: Standard Pacific (SPF).

I'm adding Standard Pacific to the Bricks and Mortar mock portfolio as a flagged stock, which means I think the stock should be sold because it is overvalued and has numerous hidden dangers. Buying the stock today is a bet that the company can survive in its current form -- something I don't think is likely.

Before I delve into Standard Pacific and update two other portfolio holdings, Ryland (RYL) and Starwood (HOT), with news this week, let me share a "big picture" thought on the homebuilding sector.

This week, I had the pleasure of attending a lecture by Marc Lasry, one of the pioneers of distressed debt investing. He is the founder and managing partner of Avenue Capital, a $20 billion fund that generally looks for subordinated debt securities that produce equity-like returns.

Avenue has averaged about 16% annual returns in its institutional fund over the past decade by scouring the U.S., Europe and Asia for distressed bonds. Naturally, I had to ask Lasry what he thought of homebuilder bonds, many of which are already trading at distressed levels. This includes Standard Pacific.

While Lasry didn't mention specific homebuilder names, he said his firm is doing a lot of homework on homebuilders, but has not invested yet. Why?

"You have to buy at the bottom to make money," he said. "Homebuilders are not there yet."

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