Should You Sell AeroVironment Right Now?

Should you sell AeroVironment (Nasdaq: AVAV  ) 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 AeroVironment, ready to evaluate its price, valuation, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, AeroVironment is down 12.3% versus an S&P 500 return of 11.3%. Investors in AeroVironment 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 AeroVironment investing thesis. For historical context, let's compare AeroVironment'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:

Company

Recent Price

52-Week High

5-Year High

AeroVironment $25.21 $35.38 $41.20
Boeing (NYSE: BA  ) $64.36 $76.00 $107.80
Eaton (NYSE: ETN  ) $96.62 $98.34 $104.10
Measurement Specialties (Nasdaq: MEAS  ) $25.94 $26.75 $30.00

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

As you can see, AeroVironment 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 AeroVironment's valuation. I'm comparing AeroVironment's recent P/E ratio of 26.6 to where it's been over the past five years.

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

AeroVironment's P/E is lower than its three-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, AeroVironment 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 AeroVironment's gross margin over the past five years:

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

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

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

AeroVironment **** 8.7
Boeing *** 1.3
Eaton **** 2.1
Measurement Specialties *** 4.8

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

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

Here, short interest is at a high 8.7%. This typically indicates that large institutional investors are betting against the stock.

Now, let's study AeroVironment'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.

AeroVironment has a great job of wiping out its already-insignificant debt from 2005. Combine that with increasing total equity, and the company has had a 0% debt-to-equity ratio since 2006.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If AeroVironment 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 last filing, AeroVironment has a current ratio of 9.02. 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 AeroVironment 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 AeroVironment.

The final recap


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

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.

AeroVironment is a Motley Fool Rule Breakers recommendation. 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.


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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 December 01, 2010, at 1:33 PM, rookie2010 wrote:

    I'm just a rookie, but AVAV has been very consistent this month, and was doing fine until this article appeared, so thanks!....your title choice is a bit misleading, and I wonder how much money you have cost people because of the 'catchy' title choice?

  • Report this Comment On December 01, 2010, at 3:02 PM, 1dms wrote:

    These metrics are important to look at but how about a mention of the upcoming catalysts,

    -Global Observer

    -Switchblade

    -EV charging stations

    http://www.businesswire.com/news/home/20101118005584/en/NRG-...

  • Report this Comment On December 01, 2010, at 8:27 PM, investmentcafes wrote:

    Good job Jeremy.....

    i'll add that through my own " Due Diligence" I started looking into AVAV the other day.WHY...the Recent NRG story....on another Stock/News channel...cbsmarketwatch...

    HOUSTON, Nov 18, 2010 (BUSINESS WIRE) -- AeroVironment, Inc. (AV) /quotes/comstock/15*!avav/quotes/nls/avav (AVAV 24.68, -0.02, -0.08%) has joined forces with NRG Energy, Inc. /quotes/comstock/13*!nrg/quotes/nls/nrg (NRG 19.16, -0.22, -1.14%) to bring the first privately funded, comprehensive electric vehicle (EV) charging "ecosystem" to drivers in America's fourth largest city. The ecosystem is an integrated network of products, services and payment plans that helps make EVs practical for drivers. AV is the exclusive provider of home and public charging systems, installation services, energy usage monitoring and payment and subscription solutions in support of the Houston ecosystem, which can be deployed as a practical, integrated model in cities throughout North America.

    LINK http://www.marketwatch.com/story/nrg-energy-selects-aeroviro...

    Upon further search and reading,10-k's,10-Q's...ETC.. you'll uncover some very interesting facts about AVAV.

    FACT from most recent 10Q.If investing in this company listen to the upcoming conference call about the "DEBT Obligations failure"...here...

    During the fourth quarter of the fiscal year ended April 30, 2008, the Company began experiencing failed auctions on some of its auction rate securities. A failed auction occurs when a buyer for the securities cannot be obtained and the market maker does not buy the security for its own account. The Company continues to earn interest on the investments that failed to settle at auction at the maximum contractual rate until the next auction occurs. In the event the Company needs to access funds invested in these auction rate securities, the Company may not be able to liquidate these securities at the fair value recorded on July 31, 2010, until a future auction of these securities is successful or a buyer is found outside of the auction process.

    As a result of the failed auctions, the fair values of these securities are estimated utilizing a discounted cash flow analysis as of July 31, 2010. The analysis considers, among other items, the collateralization underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows, and the estimated date upon which the security is expected to have a successful auction.

    Based on the Company’s ability to access its cash and cash equivalents, expected operating cash flows, and other sources of cash, the Company does not anticipate the current lack of liquidity on these investments will affect its ability to operate the business in the ordinary course. The Company believes the current lack of liquidity of these investments is temporary and expects that the securities will be redeemed or refinanced at some point in the future. The Company will continue to monitor the value of its auction rate securities at each reporting period for a possible other-than-temporary impairment. The auction rate securities have been in an unrealized loss position for more than 12 months. The Company has the ability and the intent to hold these investments until a recovery of fair value, which may be at maturity, and as of July 31, 2010, it did not consider these investments to be other-than-temporarily impaired

    The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the available-for-sale investments as of July 31, 2010, were as follows (in thousands): SEE table on 10Q..it didn't copy well here....

    To me the upcoming conference call....

    MONROVIA, Calif., Nov. 30, 2010 (GLOBE NEWSWIRE) -- AeroVironment, Inc. (AV) (Nasdaq:AVAV) today announced it will host a conference call and live audio webcast to review its second quarter fiscal 2011 results at 1:30 p.m. Pacific Time on Tuesday, December 7, 2010.

    Hosting the call to review results for the fiscal second quarter ended October 30, 2010, will be Timothy E. Conver, chief executive officer, Jikun Kim, chief financial officer, and Steven A. Gitlin, vice president of investor relations.

    Conference Call Event Summary

    Date: December 7, 2010

    Time: 1:30 PM PT

    Listen via Internet: http://investor.avinc.com/

    Schedule this webcast into MS-Outlook calendar (click open when prompted): http://apps.shareholder.com/PNWOutlook/t.aspx?m=44965&k=...

    Toll-free: (877) 561-2749

    International: (678) 809-1029

    This conference Call should discuss...

    Did that DEBT get Rolled over? at what RATES..if not whynot.?

    What is the expected time frame of the " Charging rollouts"...other parts of the country? Partners there...? Funding...

    What percent will be privately funded as with the NRG phase....

    What is the expected NRG Margins...profit outlooks...ETC...

    And as the recent chart indicates it's Pullingback into a current Uptrend line around $23.50...that line most likeley will be met @ DEC7th...no coincidence most likely Mutual funds/Big money..ETc. is waiting for that conference call

    The current 200 DMA/50 DMa are near $23.50..the 100 DMA abit lower..see CHART.!!

    I would not be able to estimate the increased Sales,ROI,Profits..ETC.. of Charging Stations until listening to the conference call..

    the Sales to date from the unmanned systems is what has allowed AVAV to survive.

    I have no position here...but if I were to invest here..if AVAV reaches $23.50 before Conference call initiate 1/4 position....Wait until- " Listen To" the Conference Call for the updates and particulars of my and the Articles aforementioned particulars....buying before then in my humble opinion would be " Foolish".!

    I will attempt to listen to that very important conference call....I do like the Growth prospects of the NRG/AVAV partnership, and upcoming rollout's.

    They also have added Nissan " LEAF" Charging to their lineup of rollouts.that is a very important partnership as will be the " Chevy Volt"....not sure if thats in the mix yet but surely will be.

    I most likely will upthumb this after the conference call....

    I would add the other name in the green Vehicle area I like is....WPRT another diverse company with direct solutions/Sales affecting the transportation industry.

    Happy Trails

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