How 'Bricks and Mortar' Bets Had Solid Gains

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.

Find the winners and throw out the losers. That was my simple philosophy when starting the "Bricks and Mortar" mock portfolio earlier this year.

So far, it has turned out well. Though I made some bad calls, my picks averaged a 20% return since the portfolio's inception in late January. This beats the S&P 500's return of 4% in the same time frame.

Hopefully, you paid more attention to my "flags" than to my "buys." Finding overvalued stocks was clearly my forte this year.

A prime example is Home Solutions of America(HSOA Quote). I first flagged the construction services firm as overvalued in April. The stock has fallen 80% since then.

When I first looked at the company, I found many textbook red flags: several related-party transactions, ballooning accounts receivable coupled with negative cash flow, and just one bullish analyst covering the stock. I felt upcoming earnings were likely to disappoint because the company was no longer relying on high-margin cleanup work from Hurricane Katrina and had business lines tied to the residential housing market.

Home Solutions ended up posting two quarters of earnings in line with the analyst guidance. But last week, the company warned it would restate both quarters' results because it accelerated revenue recognition on certain related-party contracts. The stock now trades around $1.

I'm now pulling the stock out of the portfolio, closing the pick as a success.

Listening to my advice on Trump Entertainment(TRMP Quote) also proved worthwhile. In late January, I warned that the casino operator's shares were overvalued given the coming slowdown in the Atlantic City, N.J., market.

At the time, the stock was trading at $17.50 and swarming with rumors that Wynn Resorts(WYNN Quote) was looking to buy the company. The stock is now down 74% to $4.60 after several quarters of ugly Atlantic City results.

Builders Burn

My calls on homebuilders proved very profitable as the housing market deteriorated throughout the year. I pegged Ryland(RYL Quote) as overvalued back in late January, in the same article. The homebuilder sector had been rallying at that time, because people expected a recovery in the housing market in 2007, a concept that seemed ludicrous to me.

As well, Ryland traded at one of the highest price-to-book multiples in the group in January. The thinking was that Ryland wouldn't record large impairment charges since it hadn't slashed prices on its homes.

Those ideas, as we now all know, have proven to be foolish. The builder recorded $357 million of impairment charges in the first three quarters of this year, and its stock has fallen 51% since my rating.

I continue to believe that small-cap homebuilder Standard Pacific(SPF Quote) is facing a possible restructuring or bankruptcy in 2008, and that is why I flagged the stock as overvalued in late October. This story has yet to fully play out.

Standard Pacific remains at the mercy of its banks, as it has already violated several debt covenants. The builder also carries some of the largest joint-venture risk of any other homebuilder, with significant exposure to the California housing market (one of the worst in the country). The stock has fallen 32% in two months since my warning, and I continue to believe it is a value trap.

Bricks and Mortar Portfolio A Look at How Nicholas Yulico's Picks Have Performed
	Rating Date	Price at Rating	Rating	Current Price*	Return**
Brookfield Properties (BPO)	1/23/2007	$28.67	Own	$19.47	-32.1%
Global Real Estate ETF (RWX)	1/23/2007	$64	Own	$55.69	-13%
Ryland (RYL)	1/23/2007	$56	Flag	$27.40	51.1%
Trump (TRMP)	1/23/2007	$17.50	Flag	$4.49	74.3%
Penn National (PENN)	2/6/2007	$45.56	Own	$59.19	29.9%
Melco PBL (MPEL)	3/12/2007	15.46	Own	$12.17	-21.3%
Home Solutions of America (HSOA)	4/24/2007	$4.98	Flag	$1.01	79.7%
Starwood Hotels (HOT)	7/12/2007	$72.37	Own	$45.66	-36.9%
Standard Pacific (SPF)	10/26/2007	$5.25	Flag	$3.55	32.4%
Closed Ratings	Rating Date	Price at Rating	Rating	Closing Price***	Return**
Hilton (HLT)	3/2/2007	$34.69	Own	47.50	36.9%
Average Total Portfolio Return, Unweighted, (including closed ratings)					20.2%
	Close At Start of Portfolio			Current Value*
S&P 500	1427.99			1,484.53	4%
U.S. MSCI REIT Index	1140.36			885.22	-22.4%
*12/21/07 closing prices **For "flagged" stocks, a drop in price is tracked as a positive for the portfolio, and a rise in price is a negative. ***Hilton closed out of portfolio on 10/26/07 because Blackstone Group completed purchase of firm.