Should You Sell Northgate Minerals Today?

Should you sell Northgate Minerals (AMEX: NXG  ) today?

The decision to sell a stock you've researched and followed for months or years is never easy. But 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 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 Northgate Minerals, ready to evaluate its price, valuation, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, Northgate Minerals has risen by 4.3% versus an S&P 500 return of 11.3%. Investors 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 Northgate Minerals' recent price to its 52-week and five-year highs. I've also included a few other businesses in the same industry or a related one.

Company

Recent Price

52-Week High

5-Year High

Northgate Minerals $2.90 $3.59 $4.82
Barrick Gold (NYSE: ABX  ) $47.99 $49.66 $54.70
Goldcorp (NYSE: GG  ) $44.45 $47.41 $52.70
Agnico-Eagle Mines (NYSE: AEM  ) $72.58 $74.72 $83.50

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

As you can see, Northgate Minerals 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-margin 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's Northgate Minerals' gross margin over the past five years.

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

Northgate Minerals is having no trouble maintaining its gross margin, which tends to dictate a company's overall profitability. This is solid news; however, 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 Northgate Minerals. 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 (out of 5)

Short Interest (% of Float)

Northgate Minerals 5 0.5
Barrick Gold 3 1.2
Goldcorp 3 1.4
Agnico-Eagle Mines 3 4.5

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

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

Here, short interest is at a mere 0.5%. A number like this typically indicates that few large institutional investors are betting against the stock.

Now let's study Northgate Minerals' 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.

I consider a debt-to-equity ratio below 50% to be healthy, though the number can vary by industry. Northgate Minerals is currently below this level, at 9.6%.The company has been taking on some additional debt, and debt-to-equity has consequently spiked over the past few years. The trend isn't great by itself, but the relativity low amount of debt should give investors nothing to worry about.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Northgate Minerals had to convert its current assets to cash in one year, how many times over could it cover its liabilities? As of the last filing, the company has a current ratio of 2.25. That's a healthy sign. I like to see companies with current ratios greater than 1.5.

Finally, it's highly beneficial to determine whether Northgate Minerals 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 adding Northgate Minerals.

The final recap

Northgate Minerals has failed one of the quick tests that would make it a sell. Does that mean you should hold your shares? Not necessarily. Just keep your eye on these trends over the coming quarters.

Remember to add Northgate Minerals to My Watchlist to help you keep track of all our coverage of the company on Fool.com.

If you haven't had a chance yet, be sure to read this article detailing how I missed out on more than $100,000 in gains through wrong-headed selling.

Jeremy Phillips owns no shares of the companies mentioned. 

Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 25, 2010, at 11:27 AM, cjhulin85 wrote:

    So Jeremy after all your in depth analysis of Northgate,

    will the price ever get above $3.50. Have notice some large volume in the last few days if that makes a difference.

  • Report this Comment On October 25, 2010, at 6:09 PM, rfaramir wrote:

    I don't see how you can see "increasing debt-to-equity".

    In terms of absolute percentage change from the beginning of your chart, it is down slightly. in terms of up and down years, you have this pattern: down, up, up, down. Totally inconclusive. The most recent year was down. The current level compared to the other years on the chart: compared to 2005, lower, to 2006, higher, to 2007, lower, to 2008, lower.

    So if anything, I'd say that passes your test (stable or decreasing). Mostly it's a wash, but that would imply "stable".

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