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.

Often, beaten-down stocks are in the garbage bin for a reason. They're not value stocks, but instead just bad stocks, with negative stories that may only get worse.

Casino operator Trump Entertainment ( TRMP) and construction-management firm Home Solutions of America ( HSOA) fall into this camp, and I continue to expect these stocks to disappoint investors in coming months.

Both companies, which I've flagged as poor stock picks for several months now in the Bricks and Mortar mock portfolio, reported earnings this week. Of the two, Trump is the slightly prettier story, while Home Solutions continues to master the art of limited disclosure.

Trump a Tough Call

Trump Entertainment shares rallied sharply after the company reported its second-quarter results this week. But investors shouldn't take this as a sign that the Atlantic City casino operator's stock is a buy now.

Trump's stock hit a 52-week low of $5.15 prior to its second-quarter report Tuesday, but it rebounded and is now trading around $6.90. The casino operator reported a widened loss as margins dropped sharply because of increased promotion spending in the Atlantic City market, where Trump's three casinos sit.

Revenue fell 4.6% as the Atlantic City market continues to struggle from the introduction of a limited smoking ban and increased competition from new slots parlors in Pennsylvania and New York.

I flagged Trump as overvalued in January. Since then, the stock has fallen 62%. I'm keeping my flag rating today, though I believe the stock is closer to being fairly valued.

You can make a bearish or bullish case on the stock right now, and I'll grant there's a 50-50 chance of the stock moving 20% in either direction. So unless you're betting on volatility through options trades or just like gambling on even-money bets, the stock is not a great investment.

That said, if you believe the Atlantic City casino market will rebound at some point and think the company's massive spending on technology improvements will actually put its margins in line with its peers, then the stock is probably worth looking at as a buy. If the company can slow down its capital expenditures in coming years, while also growing its earnings before interest, taxes, depreciation and amortization at the rate analysts expect, then the stock has a reasonable valuation.

The bear case is that Trump has a huge debt burden and is squeaking by on its covenants with lenders at a time when the Atlantic City market shows no signs of getting better. One covenant requires Trump to maintain an interest coverage ratio of 1.35, based on its EBITDA and interest expense. Currently, the ratio is over 1.5 times, Trump CFO Dale Black told me this week after earnings.

If operating income continues to remain under pressure, Atlantic City revenue continues to fall, and the introduction of player-tracking technology does not provide the margin boost that Trump expects, then there is a reasonable shot that Trump breaches this covenant this year.

About 85% of Trump's permanent capital is debt. Such a covenant breach would be a huge negative for shares.

There's also little evidence that Atlantic City is improving. In July, total casino revenue in the city fell 2.3% from a year earlier, the New Jersey Casino Control Commission said Friday. Slot revenue in the market fell 5.1%, while table revenue increased 4.9%.

Total revenue rose 1.8% at Trump's Taj Mahal site, increased 0.6% at Trump Plaza, and fell 1.5% at Trump Marina, as decreased slot machine use at all three properties hurt results.

The data were particularly weak given that Atlantic City casinos were closed for three days in July 2006 because of a government budget shutdown.

Home Solutions Questions

Home Solutions, another stock I've flagged as overvalued, reported earnings late Thursday of 15 cents a share for its latest quarter, which was essentially in line with guidance. Revenue more than doubled from a year earlier to $51 million, helped by numerous acquisitions.

Despite the improved results, the stock was down 65 cents, or 11%, to $5.17 in recent trading.

There are several reasons for investors to remain wary of Home Solutions. Management is not giving earnings guidance for the remainder of the year -- a new policy. The company also continues to give zero additional color on its previously announced $200 million in contracts for projects in New York City and Tampa, Fla. The company still hasn't verified exactly where the bulk of these jobs are located, as I reported in June.

Home Solutions also did not include a balance sheet in earnings release, so investors have no idea if the company's accounts receivables ballooned in the past quarter.

We do know, however, that the company continues to take longer to collect its accounts receivable. This is a huge red flag. Home Solutions said its days sales outstanding -- a measure of how long it takes to collect revenue from customers -- rose to 105 days in the second quarter from 90 days in the first quarter.

One of my major knocks on this company is that it manages to produce earnings and revenue growth each quarter but has done a horrible job of converting this revenue into cash.

On its earnings call, management said the company had $12 million of negative cash flow from operations, while cash was at the $5 million level, slightly lower than the $5.5 million from the prior quarter. Analysts had been expecting the company to turn cash flow positive at some point this year.

Management also continues to do a poor job of explaining just how far its margins will fall in coming quarters as the business model shifts from higher-margin hurricane recovery work to lower-margin construction management work.

My earnings model takes a more conservative stance on margins and revenue growth, which is why I expect Home Solutions to report earnings per share of around 40 cents to 45 cents this year, as opposed to the 60-cent average estimate from the two analysts following the stock.

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 $24.57 -14.3%
Global Real Estate ETF (RWX) 1/23/2007 $64 Own $61.41 -4.0%
Ryland (RYL) 1/23/2007 $56 Flag $38.44 31.4%
Trump (TRMP) 1/23/2007 $17.50 Flag $7.60 56.6%
Penn National (PENN) 2/6/2007 $45.56 Own $56.83 24.7%
Hilton (HLT) 3/2/2007 $34.69 Own $44.30 27.7%
Melco PBL (MPEL) 3/12/2007 $15.46 Own $13.27 -14.2%
Home Solutions of America (HSOA) 4/24/2007 $4.98 Flag $5.82 -16.9%
Starwood Hotels 7/12/2007 $72.37 Own $56.16 -22.4%
Average Total Return, Unweighted 7.6%
Close At Start of Portfolio Current Value
S&P 500 1427.99 1453.09 1.8%
U.S. MSCI REIT Index 1140.36 979.9 -14.1%
*(8/9/07 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.

'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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