Time to Sell Nordic American Tanker Shipping?

Should you sell Nordic American Tanker Shipping (NYSE: NAT) today?

The decision to sell a stock you've researched and followed for months or years is never easy. If you fall in love with your stock holdings, you risk becoming vulnerable to confirmation bias -- listening only to information that supports your theories, and rejecting any contradictions.

In 2004, longtime Fool Bill Mann called confirmation bias one of the most dangerous components of investing. This warning has helped my own personal investing throughout the Great Recession. Now, I want to help you identify potential sell signs on popular stocks within our 4-million-strong Fool.com community.

Today, I'm laser-focused on Nordic American Tanker, ready to evaluate its price, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, Nordic American Tanker is down 7.9%, versus a positive S&P 500 return of 11.3%. Investors in Nordic American Tanker Shipping are no doubt disappointed with their returns, but is now the time to cut and run? Not necessarily. Short-term underperformance alone is not a sell sign. The market may be missing the critical element of your investing thesis.

For historical context, let's compare Nordic American Tanker's recent price to its 52-week and five-year highs. I've also included a few other businesses in the same or related industries:

Source: Capital IQ, a division of Standard & Poor's.

As you can see, Nordic American Tanker is down from its 52-week high. If you bought near the peak, now's the time to think back to why you bought it in the first place. If your reasons still hold true, you shouldn't sell based on this information alone.

Potential sell signs
First, let's look at the gross margins trend, which represents the amount of profit a company makes for each $1 in sales, after deducting all costs directly related to that sale. A deteriorating gross margin over time can indicate that competition has forced the company to lower prices, that it can't control costs, or that its whole industry's facing tough times. Here is Nordic American Tanker's gross margin over the past five years:

Source: Capital IQ, a division of Standard & Poor's; prices in millions.

Over the past five years, Nordic American Tanker has maintained its gross margin, which tends to dictate a company's overall profitability. This is solid news; however, Nordic American Tanker Shipping investors need to keep an eye on this over the coming quarters. If margins begin to dip, you'll want to know why.

Next, let's explore what other investors think about Nordic American Tanker. We love the contrarian view here at Fool.com, but we don't mind cheating off of our neighbors every once in a while. For this, we'll examine two metrics: Motley Fool CAPS ratings and short interest. The former tells us how Fool.com's 170,000-strong community of individual analysts rate the stock. The latter shows what proportion of investors are betting that the stock will fall. I'm including other peer companies once again for context.

Source: Capital IQ, a division of Standard & Poor's.

The Fool community is rather bullish on Nordic American Tanker. We typically like to see our stocks rated at four or five stars. Anything below that is a less-than-bullish indicator. I highly recommend you visit Nordic American Tanker's stock pitch page to see the verbatim reasons behind the ratings.

Here, short interest is a high 10.2%. This typically indicates that large institutional investors are betting against the stock.

Now let's study Nordic American Tanker's debt situation, with a little help from the debt-to-equity ratio. This metric tells us how much debt the company's taken on, relative to its overall capital structure.

Source: Capital IQ, a division of Standard & Poor's.

Nordic American Tanker has done a good job of wiping out its debt over the past five years. When we take into account increasing total equity over the same time period, this has caused debt-to-equity to decrease to 0% (at which point the metric is no longer relevant.) Based on the trend alone, that's a great sign.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Nordic American Tanker had to convert all of its assets to cash in one year, how many times over could the company cover its liabilities? Nordic American Tanker Shipping has a current ratio of 43.8. This is a healthy sign. I like to see companies with current ratios greater than 1.5.

Finally, it's highly beneficial to determine whether Nordic American Tanker Shipping belongs in your portfolio -- and to know how many similar businesses already occupy your stable of investments. If you haven't already, be sure to put your tickers into Fool.com's free portfolio tracker, My Watchlist. You can get started right away by clicking here to add Nordic American Tanker Shipping

The final recap

Nordic American Tanker has failed only one of the quick tests that would make it a sell. This is great, but does it mean you should hold your Nordic American Tanker shares? Not necessarily. Just keep your eye on these trends over the coming quarters.

Remember to add Nordic American Tanker Shipping to My Watchlist  to help you keep track of all our Foolish coverage of the company.

What companies would you like me to cover next in this series? Please leave your comments below.