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3 Homebuilder Stocks to Avoid

Stocks in this article: TOL DHI CHCI

MINNEAPOLIS ( Stockpickr) -- I have two beautiful little girls, ages 7 and 4. Patience is not one of their strong suits. Specifically, whenever we go anywhere, they impatiently ask, "Are we there yet?"

I hear the same thing from investors wondering about the status of the homebuilding sector. At some point the industry will recover, right? It has been a long three years since the housing bubble was pricked. It is reasonable to think that some time soon the sector will rebound.

And yet here we are late in 2010 forecasting more trouble ahead for homebuilders in 2011. Can the industry handle another year of weak sales amid falling prices and ever-growing supply?

Well, homebuilders certainly made enough money during the boom years. Their balance sheets are mostly strong, and the answer is yes, they can survive another weak year. As passive investors, we must remain diligent in our analysis of the homebuilders before deciding to take the leap.

>>Also: Rocket Stocks: Ford, Stryker, Starwood

Some are not waiting, choosing to buy into the group deciding that a bottom has been reached. Shares of most homebuilders have rebounded, and those with weaker balance sheets have attempted to shed distressed assets in an effort to clean things up.

I think those investors are jumping the gun. As tempting as it may be to say that a bottom has been reached, the industry has not yet finished enduring the pain of foreclosures and prices bid up way too high.

The economy is still fragile, foreclosures continue to flood the market, and prices remain stubbornly high. Even more problematic for investors is that premature buying of stocks in the sector push valuations well above what would historically be called cheap.

>>Also: 7 Stocks to Buy for a Santa Claus Rally

In my opinion, 2011 is setting up for this entire sector to be shorted. Valuations are too expensive and operating conditions are likely to be negative. In an irrational market that is mostly inefficient anything can happen. That said the bias for this group is straight down.

It would be easy to see 15% to 20% losses in the group. Here are three stocks to avoid buying right now .

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