Should You Sell NCI Building Systems Right Now?

Should you sell NCI Building Systems (NYSE: NCS  ) 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 NCI Building Systems, ready to evaluate its price, valuation, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, NCI Building Systems is down 30.4% versus an S&P 500 return of 11.3%. Investors in NCI Building Systems 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 NCI Building Systems investing thesis. For historical context, let's compare NCI Building Systems' recent price to its 52-week and five-year highs. I've also included a few other businesses in the same or related industries:

Company	Recent Price	52-Week High	5-Year High
NCI Building Systems	$9.53	$18.40	$350.00
Simpson Manufacturing (NYSE: SSD  )	$25.78	$35.59	$45.50
Texas Industries (NYSE: TXI  )	$31.52	$43.50	$93.80
Griffon (NYSE: GFF  )	$12.19	$15.13	$28.60

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

As you can see, NCI Building Systems 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 NCI Building Systems' gross margin over the past five years:

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

NCI Building Systems is clearly having issues maintaining its gross margin, which tends to dictate a company's overall profitability. NCI Building Systems investors need to keep an eye on this troubling trend over the coming quarters.

Next, let's explore what other investors think about NCI Building Systems. 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.

Company	CAPS Rating	Short Interest (Float)
NCI Building Systems	4	10.9
Simpson Manufacturing	4	6.3
Texas Industries	2	21.0
Griffon	4	4.7

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

The Fool community is rather bullish on NCI Building Systems. 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 NCI Building Systems' stock pitch page to see the verbatim reasons behind the ratings.

Here, short interest is at a high 10.9%. This typically indicates that large institutional investors are betting against the stock.

Now, let's study NCI Building Systems'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.

Despite declining total equity, NCI Building Systems has done a good job of reducing its debt over the past five years, which has caused the company's debt-to-equity to decrease. Based on the trend alone, that's a good sign. I consider a debt-to-equity ratio below 50% to be healthy, though it varies by industry. NCI Building Systems is currently slightly above this level, at 53.7%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If NCI Building Systems had to convert its current assets to cash in one year, how many times over could the company cover its liabilities? As of the last filing, NCI Building Systems has a current ratio of 1.98. 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 NCI Building Systems 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 NCI Building Systems

The final recap

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

Remember to add NCI Building Systems to My Watchlist  to help you keep track of all our coverage of the company on Fool.com.

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