5 Builder Stocks to Wreck Your Portfolio

It's hardly news that the homebuilding business is struggling. Even at the best of times, the materials and construction industry can be a capital-intensive, barely profitable, and difficult way to make money. In today's economic climate, the deadly triumvirate of reduced spending, tighter consumer credit, and rising inventories will likely exterminate weaker players in this space.

Simply put, one wrong move in the homebuilding industry could cost you dearly. Just ask the shareholders of Centex and Hovnanian Enterprises (NYSE:HOV). Those businesses' imprudent moves have reduced once-sizable investments to nickels and dimes.

Since the best offense is a good defense, I ran a screen on CAPS, the Motley Fool's investing community, in hopes of avoiding some of the worst builders the market has to offer.

I used a few simple criteria for this search:

• I only wanted to consider stocks in the materials and construction industry that our CAPS community brands the worst of the worst. These businesses have at least 150 active picks with one- or two-star ratings, CAPS' lowest possible.

• A return on equity of less than 5% indicates a tough and potentially failing business. As the screen will show, many of these companies aren't profitable at all.

• Insiders on sinking ships couldn't care less about shareholders. To watch out for insiders who could jump overboard, we'll look for companies with very low levels of insider ownership -- in this case, below 4%.

• Finally, while it's not a hard-and-fast rule, it's generally important to keep your hands away from falling knives. We'll screen for businesses that have dropped at least 25% from their 52-week.

Here's what the CAPS screen came up with. Most of these names probably won't surprise you:

Source: Motley Fool CAPS.

Please note that these companies could either be deeply undervalued or value traps. As always, before you go long or short, it's important to do your own due diligence. That said, here's what a few CAPS community members have to say about these particular businesses.

Back in March, CAPS member kurtabear wrote this about Lennar:

Somehow I overlooked this one when I started shorting home builders last year. It's great to have the opportunity to get greedy and get a few bucks out of this one. There's no way homebuilders -- individually or as a group -- recover any time inside of the next 5 to 10 years. The bubble has burst, and Humpty-Dumpty can't be put back together again.

fOOLSONPARADE wrote a rather fitting pitch about the Ryland Group in March:

Housing market is going down... But you say, "People need a house to live in!" ... But the foreclosure/default rates show another story. As a whole, the housing industry is seeing hard times and another batch of ARM resets are due out in the next couple months. Not to mention lending practices are being tightened and scrutinized. Furthermore, housing slumps are usually a good indicator of recessions. Why? Real estate affects consumer spending.

Regarding Avatar Holdings, NeroSagetrade prophesized late last year:

Man did these guys just pick a crapola time to come to market. SoCal and Florida are just horrid housing markets right now. Housing closes fell dramatically in their most recent quarter, falling 51%. Earnings dropped 81% to just 55 cents a share and they made it seem very clear that they expect these conditions to persist. The whole housing market is terrible right now which we already know, but how in the hell is this still being valued above $50 I'll never know!

Conditions have actually worsened for Avatar; it's currently trading in the low $30s.

Are these one-star companies ready to break your portfolio, or are they simply misunderstood investments? The more than 115,000 members of our CAPS community, comprising some of the brightest minds around, would like to know what you think. Sign up today -- it's 100% free.

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