Of course, there aren't a lot of people short utilities, so they're not good candidates for short squeezes the way that REITs have been. If you're a speculator trying to make quick money squeezing shorts, REITs are definitely a solid way to do that.

However, that is not an investment. That is speculation. If people are going to play that game, they should understand it for what it is, so they don't get left holding the bag when the speculators move on to the next short-squeeze play.

By any reasonable measure, the REIT index is at least 20% overvalued. That is assuming that there are no bumps on the road to economic recovery, that REITs substantially increase their dividends as everyone expects, that they have no problems rolling over debt and that they don't issue a ton of new equity that is dilutive to shareholders. To put it simply, most REITs are priced for perfection.

The current period for REITs is not, as some have suggested, comparable to 1991. From 1991 through the peak of the bubble in 2007, when Blackstone ( BX) bought Equity Office Properties, REITs were valued at ratios at least 30% and as much as 50% lower than current ratios to FFO.

To justify current FFO ratios, FFO would need rise more rapidly than it has ever risen in history. With high vacancies in almost every market, the chance of this happening seems extremely remote.

But REITs just keep going up. Well, there is a word for buying something just because it is going up. That word is speculation, and it works until it doesn't work. There are always lots of reasons people will give you why it makes sense and why this time it's different, but they won't write you a check for the money you're going to lose when the party ends and you're too slow to get out.

However, if you do want to speculate in REITs, the best way to do it would be to buy Maguire Properties ( MPG). This is one of most hated companies in the REIT sector, but the hate is not justified. It owns great properties. It has great management. It is doing all of the right things.

Maguire Properties' shares are very cheap if the company can continue to execute and get forbearance from its lenders. The stock is currently around $4 and could easily go to $8 if commercial real estate markets and financing continues to improve. It's also a very appealing acquisition target for larger, stronger REITs with inflated stock prices and plenty of cash from recent issuance of new shares. Basically, if the REIT rally continues, Maguire Properties should outperform in 2010 the way General Growth ( GGP) did in 2009.

So if you want to roll the dice, buy some shares of Maguire Properties. But realize that you're speculating, not investing. If you want a solid dividend-paying investment that isn't at risk of falling 20% or more soon after you buy it, buy utilities such as XLU. And be careful out there.

-- Written by Christopher Grey in Manhattan Beach, Calif.

At the time of publication, Grey owned shares of Maguire Properties and the Gabelli Utilities AAA Fund (GABUX).
Christopher Grey is a co-founder and CFO of CapLinked. CapLinked makes it easier for companies and investors to connect with each other. He was previously a senior executive and partner in private equity, finance and banking for 15 years and directly involved in the origination and management of billions of dollars of debt and equity investments. Grey is a founding member of the Capital Markets Forum II of the National Association of Office and Industrial Properties. He is also founder of and on the Steering Committee of Stanford Professionals in Real Estate. He is a graduate of Stanford University, with a degree in economics.

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