Should You Sell Jacobs Engineering Group Right Now?

Should you sell Jacobs Engineering Group (NYSE: JEC  ) 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 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 Jacobs Engineering Group, ready to evaluate its price, valuation, margins, and liquidity. Let's get started.

Don't sell on price
Over the past 12 months, Jacobs Engineering Group is down 14.2% versus an S&P 500 return of 11.3%. Investors in Jacobs Engineering Group 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 Jacobs Engineering Group investing thesis. For historical context, let's compare Jacobs Engineering Group's recent price with its 52-week and five-year highs. I've also included a few other businesses across the design and services industry:

Company

Recent Price

52-Week High

5-Year High

Jacobs Engineering Group $39.38 $50.68 $103.30
Fluor (NYSE: FLR  ) $51.87 $55.47 $202.70
SAIC (NYSE: SAI  ) $16.08 $19.76 $21.90
KBR (NYSE: KBR  ) $25.40 $25.67 $45.20

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

As you can see, Jacobs Engineering Group 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 up, we'll get a rough idea of Jacobs Engineering Group's valuation. I'm comparing the company's recent P/E ratio of 20.2 to where it has been over the past five years.

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

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

Jacobs Engineering Group's P/E is lower than its five-year average, which could indicate the stock is undervalued. A low P/E isn't always a good sign, since the market may be lowering its valuation of the company because of less attractive growth prospects. It does indicate that, on a purely historical basis, Jacobs Engineering Group looks cheap.

Now, 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 Jacobs Engineering Group's gross margin over the past five years:

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

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

Jacobs Engineering Group is having no trouble maintaining its gross margin, which tends to dictate a company's overall profitability. This is solid news; however, the company's investors need to keep an eye on this over the coming quarters. If margins begin to drop, you'll want to know why.

Next, let's explore what other investors think about Jacobs Engineering Group. 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 rates 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 (% of Float)

Jacobs Engineering Group **** 2.3
Fluor ***** 3.6
SAIC **** 4.6
KBR **** 1.1

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

The Fool community is rather bullish on Jacobs Engineering Group. 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 Jacobs Engineering Group's stock pitch page to see the verbatim reasons behind the ratings.

Here, short interest is at a mere 2.3%. This typically indicates few large institutional investors are betting against the stock.

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

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

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

Jacobs Engineering Group has done a good job of reducing its already-microscopic debt over the past five years. When we take into account increasing total equity over the same time, this has caused debt-to-equity to decrease, as seen in the above chart. 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. Jacobs Engineering Group is below this level, at 3.3%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Jacobs Engineering Group had to convert its current assets to cash in one year, how many times over could the company cover its liabilities? As of the latest filing, Jacobs Engineering Group has a current ratio of 2.03. 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 Jacobs Engineering Group 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 Jacobs Engineering Group.

The recap

Jacobs Engineering Group has failed none of the quick tests that would make it a sell. This is great, but does it mean you should hold your Jacobs Engineering Group shares? Not necessarily. Just keep your eye on these trends over the coming quarters.

Remember to add Jacobs Engineering Group 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 does not own shares of the companies mentioned.

SAIC is a Motley Fool Inside Value pick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (9)

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 28, 2010, at 6:21 PM, xferjenx wrote:

    If you own it, abandon ship. Their employees are...

  • Report this Comment On October 28, 2010, at 10:13 PM, BarryBannister wrote:

    I am barry bannister. i follow Jacobs and other E&Cs on the sell-side. Fluor has never been $200+ as you say, i think you double-counted a split.

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Related Tickers

7/30/2014 4:04 PM
FLR $75.04 Up +0.44 +0.59%
Fluor Corporation CAPS Rating: ****
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KBR $22.16 Up +0.16 +0.73%
KBR, Inc. CAPS Rating: ****
SAI $0.00 Down +0.00 +0.00%
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