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.With the housing market still crumbling, there is a decent chance that some homebuilders are going to go bankrupt over the next year. That means if you're eyeing homebuilder stocks, you have to be looking at the companies' debt loads and the cash flows. And in these areas, there's one builder that looks like it's heading for trouble: Standard Pacific ( SPF). I'm adding Standard Pacific to the Bricks and Mortar mock portfolio as a flagged stock, which means I think the stock should be sold because it is overvalued and has numerous hidden dangers. Buying the stock today is a bet that the company can survive in its current form -- something I don't think is likely. Before I delve into Standard Pacific and update two other portfolio holdings, Ryland ( RYL) and Starwood ( HOT), with news this week, let me share a "big picture" thought on the homebuilding sector. This week, I had the pleasure of attending a lecture by Marc Lasry, one of the pioneers of distressed debt investing. He is the founder and managing partner of Avenue Capital, a $20 billion fund that generally looks for subordinated debt securities that produce equity-like returns. Avenue has averaged about 16% annual returns in its institutional fund over the past decade by scouring the U.S., Europe and Asia for distressed bonds. Naturally, I had to ask Lasry what he thought of homebuilder bonds, many of which are already trading at distressed levels. This includes Standard Pacific. While Lasry didn't mention specific homebuilder names, he said his firm is doing a lot of homework on homebuilders, but has not invested yet. Why? "You have to buy at the bottom to make money," he said. "Homebuilders are not there yet."
Still Rough Times at RylandMy other flagged builder, Ryland, posted earnings that were a bit better than those of its peers. Inventory impairments totaled $128 million, which pushed the company to
Starwood BurnsStarwood, a hotel owner and operator, also posted third-quarter results this week, and results weren't great. Revenue growth is slowing at its hotels, and the company gave a weak outlook on timeshare profits next year. This stock has been an absolute dog in recent months. My sense right now is that shares will be dead in the water for some time, as investors fret about the health of the economy and the lodging sector. Starwood's ability to generate a lot of free cash flow hasn't changed. In the meantime, investors must stomach the possibility of slowing earnings growth over the next year. Over the long term, earnings growth continues to look nice, since Starwood will expand its brand globally in the next five years. With all of its free cash flow, it would be nice to see Starwood execute a big share buyback. Starwood is down 24% since I recommended buying it in July. At around $55 today, it looks cheap. But if the market keeps telling me I'm wrong on this one, I'll likely throw in the towel. A 30% decline in the stock since my recommendation is probably my breaking point. At some point, you have to admit you're wrong, cut your losses and move on.
|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||$23.77||-17.1%|
|Global Real Estate ETF (RWX)||1/23/2007||$64||Own||$63.16||-1.3%|
|Penn National (PENN)||2/6/2007||$45.56||Own||$61.81||35.7%|
|Melco PBL (MPEL)||3/12/2007||$15.46||Own||$15.79||2.1%|
|Home Solutions of America (HSOA)||4/24/2007||$4.98||Flag||$3.15||36.7%|
|Starwood Hotels (HOT)||7/12/2007||$72.37||Own||$55.61||-23.2%|
|Average Total Portfolio Return, Unweighted, (including closed ratings)||19.3%|
|Standard Pacific (SPF)||10/26/2007||$5.25||Flag||$5.25||0|
|Closed Ratings||Rating Date||Price at Rating||Rating||Closing Price***||Return**|
|Close At Start of Portfolio||Current Value*|
|U.S. MSCI REIT Index||1140.36||1,000.37||-12.3%|
|*(10/25/07 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 exited the portfolio on 10/26/07 after being acquired by Blackstone Group