Time to Sell TeleCommunication Systems?

Should you sell TeleCommunication Systems (Nasdaq: TSYS  ) 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 TeleCommunication Systems, ready to evaluate its price, valuation, margins, and liquidity. Let's get started.

Don't sell on price
Over the past 12 months, TeleCommunication Systems is down 43.3% versus an S&P 500 return of 11.3%. Investors in TeleCommunication 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 TeleCommunication Systems investing thesis. For historical context, let's compare the company's recent price with 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

TeleCommunication Systems $4.85 $10.55 $10.60
Qualcomm (Nasdaq: QCOM  ) $47.72 $49.80 $56.90
Motorola (NYSE: MOT  ) $8.14 $8.74 $26.30

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

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

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

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

Next, let's explore what other investors think about TeleCommunication 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 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)

TeleCommunication Systems **** 7.1
Qualcomm **** 1.8
Motorola ** 1.6

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

The Fool community is rather bullish on TeleCommunication 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 that you visit TeleCommunication Systems' stock pitch page to see the verbatim reasons behind the ratings.

Here, short interest is at a high 7.1%. This typically indicates that large institutional investors are betting against the stock.

Now, let's study TeleCommunication Systems' 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.

TeleCommunication Systems has been taking on some additional debt over the past five years. Even with spiking total equity over the same time, debt-to-equity has increased, as seen in the above chart. Based on the trend alone, that's a bad sign. I consider a debt-to-equity ratio below 50% to be healthy, though it varies by industry.  TeleCommunication Systems is above this level, at 92.5%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If TeleCommunication Systems had to convert its current assets to cash in one year, how many times over could the company cover its current liabilities? As of the latest filing, TeleCommunication Systems has a current ratio of 1.64. This is a healthy sign. I like to see companies with current ratios equal to or greater than 1.5.

Finally, it's highly beneficial to determine whether TeleCommunication 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 TeleCommunication Systems.

The recap

TeleCommunication Systems has failed three of the quick tests that would make it a sell. Does it mean you should sell your TeleCommunication Systems shares today solely because of this? Not necessarily, but keep your eye on these trends over the coming quarters.

Remember to add TeleCommunication Systems 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.

The Fool owns shares of Qualcomm. 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 Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (4)

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 November 30, 2010, at 4:32 PM, boulder88 wrote:

    Are you kidding me? Sales growth isn't one of the metrics? TSYS is growing sales at a rapid pace. Sure gross margins are down from 2005 but they are up from 2008.

    Also, you use short interest as a factor. Having 7% v. 5% is what we call NMF (not meaningful). In addition, after the purchase of NIM at conversion $10 per share, sellers will take a short position to lock in. So I don't understand this unless the author does not know the company's history.

    C'mon fools - this is disappointing.

  • Report this Comment On November 30, 2010, at 4:49 PM, esteemxxxx wrote:

    You omitted the fact that though their gross margins have slightly decreased their sales have more than doubled. Since the last qtr TSYS has secured over 600 million in contracts from the U.S Government alone.

    "Despite a quarter that was clearly pressured to meet expectations, the company generated substantial cash. Ebitda was approximately $17.5m or 17% of revenues. More importantly (to me) was free cash flow. My method of measuring this company's cash generation is to take ebitda and subtract back out interest/other, purchased PPE and capitalized software development costs. That resulted in $10.8m in free cash flow. I measure that as a percentage of market cap and it came out to around 17% or about double the average over last few quarters.

    It also is worth noting that they drew down $10m on their credit facility Per management their interest rate on this debt is 4.5% which in this environment I view as a positive sign. This additional cash and free cash flow allowed TSYS to increase their cash and equivalents to $112.8m up from $76.4 only six months ago.

    Finally, it is interesting to see the early forecasts from analysts (9) covering the company. Most are still upbeat about next year. Also it appears all raised their revenue growth projections based upon the conference call commentary."

    http://seekingalpha.com/instablog/400846-marty-chilberg/1124...

  • Report this Comment On November 30, 2010, at 4:54 PM, EnigmaDude wrote:

    I agree with the other comments. This article is poorly researched and misleading. TSYS is a screaming buy at the current price.

  • Report this Comment On November 30, 2010, at 7:43 PM, esteemxxxx wrote:

    The Motley Fool

    To educate "AMUSE" and enrich

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