Homebuilders and other real estate stocks have been rallying with the financials over the past week, but dismal earnings from

Pulte Homes

(PHM) - Get Report





Starwood Hotels


are working to punish the sector today.

The three stocks are included in my Bricks and Mortar mock portfolio, which has been trading sideways of late along with the broader market.

At a time when only falling oil prices seem to spark a rally in stocks, it's not easy for investors to make money in the stock market. An even year -- one in which your portfolio loses no money -- may prove the best you can ask for in 2008.

The long-short Bricks and Mortar mock portfolio is down 3.9% this year, based on Wednesday's closing prices, better than the 12.7% decline in the

S&P 500

but worse than the 0.7% gain in the U.S. MSCI REIT Index.

The obvious conclusion here is that my real-estate heavy portfolio should have carried more real estate investment trusts, or REITs. Then again, that sector is looking pricey today, and I believe better long-term value exists in the casino and lodging stocks. That's why my mock portfolio is long several stocks in these sectors, while staying short homebuilders and construction companies.

Today's results boost my underweight thesis on the builders as both Ryland and Pulte Homes reported massive losses in their latest quarters. Both stocks carry "flag" ratings, meaning I believe they are overvalued and can be shorted. Shares of the two are falling in recent trading Thursday.

However, Starwood's earnings may be the worst of the bunch. The hotel operator -- which I rate "own" -- cut its guidance for the rest of the year, far below analysts expectations.

Starwood is facing slumping demand for its owned and managed hotels in the U.S., while international operations have held up better.

The stock is trading down 10% today, but is also now trading at a depressed P/E multiple not seen since 1999-2000.

Let's break down the results from each of these companies.

Homebuilders: Pulte, Ryland

The story on the homebuilders has not changed. The firms cannot make money because home prices continue to fall, which is forcing the companies to sell houses at a loss just to create cash flow to service their debt.

However, Pulte's results today looked much better than Ryland's. In an environment where oil is rising and home prices are adjusting downward to correct the supply/demand imbalance in the market, builders can really only do one thing to help themselves: cut expenses where they can.

Pulte did just that. Despite its ugly net loss of $158 million, the builder cut its selling general and administrative expenses by $118 million, or a 40% cut from a year ago.

The SG&A expenses as a percentage of homebuilding revenue totaled 11%, down from 15% a year ago.

Most of Pulte's quarterly loss was due to $220 million of impairment charges related to land on its balance sheet that has fallen in value. If you add back those impairment charges, which are meaningful but non-cash, then Pulte ended up with a 12% gross margin in the quarter. That's not too shabby.

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.