It’s hardly news that the homebuilding business is tough. Most would agree that even at the best of times, the materials and construction industry is a capital intensive, barely profitable, and difficult way to make money. Today, things are much worse. The deadly triumvirate of reduced spending, tighter consumer credit, and rising inventories will likely exterminate weaker players in this space.

Simply put, if you make a wrong move in the homebuilding industry, it could cost you. Just ask the shareholders of Centex (NYSE:CTX) and Hovnanian Enterprises (NYSE:HOV). The practices of those businesses have reduced sizable investments to nickels and dimes. 

Since the best offense is a good defense, I ran a screen on CAPS, the Motley Fool’s free 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 are classified by our CAPS community as being the worst of the worst. These businesses have at least 150 active picks and one- or two-star ratings, the lowest possible.
  • A return on equity of less than 5%, which indicates a tough and potentially failing business. As the results will show, many of these companies won’t be profitable at all.
  • Insiders on sinking ships could potentially care less about shareholders. One way to check this is to look for companies with very low levels of insider ownership – in this case, below 5%.
  • Finally, while not a hard and fast rule, it’s important to keep your hands away from falling knives. Businesses off their 52-week highs by at least 25% will satisfy this requirement.

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

Company

Return on Equity (TTM)

Insider Ownership

% Below 12-Month High

KB Home (NYSE:KBH)

Not Profitable

0.7%

35.66%

Louisiana Pacific (NYSE:LPX)

Not Profitable

0.5%

50.5%

Palm Harbor Homes (NASDAQ:PHHM)

Not Profitable

4.0%

32.72%

Standard Pacific (NYSE:SPF)

Not Profitable

3.3%

28.32%

Tecumseh Products (NASDAQ:TECUA)

Not Profitable

1.0%

33.33%

Source: Motley Fool Caps screen 9/30/08.

Please note that these companies could either be value traps or deeply valued. 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.

Late last year, CAPS member Rjmason wrote this about KB Home:

Dear KB Homes,
I have enough homes now. Thank you. You can stop building them.
Signed,
America

A rather fitting pitch was written by deraj83 about Standard Pacific back in March:

This stock has been beaten up for a reason. The fundamentals are terrible, and there is no good news on the horizon, but these stocks seem to rally every once in a while for no particularly good reason. I intend to remain negative on the homebuilders until one or more of the large players declare bankruptcy.

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

More CAPS content and general Foolishness:

  • A Fool’s Blog.
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  • Rising Warren Buffet stocks.

On Oct. 7, 2008, Fool Co-Founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. In the coming weeks, the team, relying heavily on proprietary CAPS "community intelligence" data, will establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds (ETFs). To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.

Wade Michels makes sure that he can’t be taken behind the woodshed by disclosing the stocks that he owns here. He doesn’t own any of the stocks mentioned. The Fool’s disclosure policy is made out of bricks.