Editor's note: "Bricks and Mortar" is a series of columns written by real estate reporter Nicholas Yulico meant to help TheStreet.com readers generate real estate and gaming-related stock ideas.


Trump Entertainment ( TRMP) shares hit an all-time low Monday, but investors should be wary of thinking the casino operator is now a value play.

Today, I'll provide an update on why I think Trump remains a stock to avoid, while also detailing the ongoing problems at homebuilder Ryland ( RYL). I flagged both stocks as overvalued in late January.

First, let's take a look at Trump, whose shares plunged more than 16% Monday after the company said it couldn't find an attractive buyout offer for shareholders.

My thesis all along has been that absent a buyout, Trump's stock would be a huge bust. Flagging Trump as overvalued at $17.50 in January has now proven to be my best call since I started the Bricks and Mortar column earlier this year. Trump's stock is down 40% since then.

With shares trading at such a depressed level, it's tempting to say that perhaps Trump has now hit a price where it makes sense to own it.

But the stock is still no bargain. Trump's three Atlantic City casinos continue to face strong headwinds from fresh competition in nearby Pennsylvania and New York.

At Trump's closing price Monday of $10.49, the stock is valued at 9.7 times this year's consensus Wall Street estimate for earnings before interest, taxes, depreciation and amortization. It's 8.5 times the 2008 estimate. That means the stock has essentially the same valuation as Ameristar ( ASCA), another small casino company.

The difference, though, is that Ameristar is profitable, close to producing free cash flow and has decent operating margins.

Trump, on the other hand, has a history of negative free cash flow and is expected to lose money this year and next. In order to compete in the market, the company must spend heavily on capital expenditures, but it already carries a high debt load.

If you've been shorting Trump, now might be a good time to cover. But if you're thinking of buying it, don't bother. Shares should just languish at these levels and may even fall further over the next few months.

Ryland Knocked Down

On Monday, Citigroup analyst Stephen Kim, the biggest homebuilder bull among sell-side analysts, finally threw in the towel and downgraded numerous names in the sector to hold from buy.

One of those stocks was Ryland, whose stock has now fallen 33% since I first noted its troubles in January.

At some point, Ryland and other homebuilders will become a buy. But not now. The U.S. housing market is plagued by high inventory levels and falling home prices. As I wrote in a previous story, nearly every homebuilder is in danger of losing money this year, including Ryland, and large land impairment charges will further erode book value.

Last week, Deutsche Bank initiated Ryland with a buy rating, highlighting the company's strong free cash flow. However, if the company loses money this year, free cash flow will turn negative.

At some point, when the housing market settles down, Ryland may very well be positioned with a healthy balance sheet. But that housing upturn isn't expected until some point in 2008, at the earliest.

Ryland and the rest of the builder stocks could fall another 15% to 20% in the next few months as book value erodes further.

Penn National Taken Out

Since my last update, Penn National agreed to a buyout at $67 per share. The stock is trading around $60, reflecting the fact that a deal closing could take over 12 months.

However, some industry watchers expect a higher offer could be made for Penn National, so I'm maintaining my buy rating on the stock for now.

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 $24.60 -14.2%
Global Real Estate ETF (RWX) 1/23/2007 $64 Own $65.85 2.9%
Ryland (RYL) 1/23/2007 $56 Flag $37.46 33.1%
Trump (TRMP) 1/23/2007 $17.50 Flag $10.49 40.1%
Penn National (PENN) 2/6/2007 $45.56 Own $60.14 32%
Hilton (HLT) 3/2/2007 $34.69 Own $33.87 -2.4%
Melco PBL (MPEL) 3/12/2007 $15.46 Own $12.43 -19.6%
Home Solutions of America (HSOA) 4/24/2007 $4.98 Flag $6.18 -24.1%
Source: *(7/2/07 closing price)
**For "flagged" stocks, a drop in price is tracked as a positive for the portfolio, and a rise in price is a negative.

'Bricks and Mortar' is a mock portfolio meant to generate investing ideas. In keeping with TSC's editorial policy, Yulico doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

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