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Crunch Time at Ryland, Pulte Homes

Meanwhile, Ryland -- which reported a loss of $242 million -- failed to manage its expenses well.

Ryland's SG&A as a percent of revenue rose to 13.8% in the quarter, up from 11.5% a year ago. Excluding the impairment charges, Ryland's gross margin was 12.5%.

Based on yesterday's closing prices, Pulte now trades at 0.93 times book value, while Ryland trades at 1.3 times book value.

Given the fact that Pulte is doing a much better job moving toward eventual profitability by managing its expenses, I expect the stock to outperform Ryland going forward. Shorting Ryland when it trades at a significant premium to book value has proven a profitable strategy over the past year.

In recent trading, Ryland shares were tumbling 20% to $21, while Pulte was losing 10% to $11.53.

Lodging: Starwood Hotels

Starwood's results showed the lodging operator continues to be a value trap for investors. Starwood said it expects adjusted earnings per share of $2.17 to $2.32 this year. Analysts currently expect Starwood to report EPS of $2.44 this year, according to Thomson Reuters. The company's quarterly EPS was 56 cents, down from 67 cents a year earlier. Analysts expected 52 cents.

Lately, Starwood's stock has traded as though investors felt the Wall Street analyst estimates for full-year 2008 were too high. Nonetheless, the lodging stocks look incredibly beaten-up today, but at this stage buying the stock has proved as safe as catching a falling knife.

While I still like the long-term story at Starwood, especially when the stock today is trading near its historically low P/E multiple, I admit there could be more pain ahead.

But the long-term thesis on Starwood remains intact. By 2010, Starwood should have about 50% of its profits coming from overseas. The company continues to generate a ton of free cash flow, and its management fee business is very high margin.

But with the weak economy reducing consumer and business travel, risk remains that analysts are still too bullish on the 2009 results. Today's guidance cut for 2008 could prove to be either a bottom for the stock or a sign that the 2009 estimates from analysts are still way too high.

Starwood is now trading at a forward P/E ratio of 13.5, based on the Wall Street estimate for 2009 EPS of $2.73.

According to data from SNL Research, Starwood hasn't traded at such a low valuation since the 1999-2000 period, when its forward P/E was in an average range of 12.2 to 15.8.

Obviously, the market today is betting that Wall Street continues to hold unrealistic expectations about how long this lodging downturn may last.

Bricks and Mortar Portfolio
A Look at How Nicholas Yulico's Picks Have Performed
Rating Date Price at Rating Rating Current Price* Total Return** Year-End '07 Price 2008 YTD Return
Brookfield Properties (BPO) 1/23/2007 28.67 Own 19.66 -31.4% 19.25 2.1%
Global Real Estate ETF (RWX) 1/23/2007 64.00 Own 48.06 -24.9% 56.95 -15.6%
Ryland (RYL) 1/23/2007 56.00 Flag 26.50 52.7% 27.41 3.3%
Penn National (PENN) 2/6/2007 45.56 Own 28.75 -36.9% 59.55 -51.7%
Melco Crown (MPEL) 3/12/2007 15.46 Own 7.98 -48.4% 11.56 -31.0%
Starwood Hotels (HOT) 7/12/2007 72.37 Own 39.82 -45.0% 44.03 -9.6%
Home Depot (HD) 1/30/2008 29.71 Own 25.03 -15.8% -15.8%
Pulte Homes (PHM) 1/31/2008 16.35 Flag 12.81 21.7% 21.7%
Boyd Gaming (BYD) 6/27/2008 12.72 Own 11.14 -12.4% -12.4%
Perini Corp. (PCR) 6/27/2008 33.42 Flag 29.79 10.9% 10.9%
Average Total Portfolio Return, Unweighted, (including closed ratings) 8.8% -3.9%
Closed Ratings Rating Date Price at Rating Rating Closing Price*** Return**
Hilton (HLT) 3/2/2007 34.69 Own 47.50 36.9%
Home Solutions of America (HSOA) 4/24/2007 4.98 Flag 1.06 78.7%
Standard Pacific (SPF) 10/26/2007 5.25 Flag 2.20 58.1% 3.35 34.3%
Trump (TRMP) 1/23/2007 17.50 Flag 3.56 79.7% 4.30 17.2%
Close At Start of Portfolio Current Value*
S&P 500 1427.99 1,282.18 -10.2% 1468.36 -12.7%
U.S. MSCI REIT Index 1140.36 877.11 -23.1% 870.64 0.7%
*(7/23/08 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.
HSOA closed out of portfolio on 12/26/07 at day's closing price
SPF closed out of portfolio on 1/11/08 at day's closing price
TRMP closed out of portfolio on 5/29/08 at day's closing price

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