Read This Before You Think About Selling MEMC Electronic Materials

Should you sell MEMC Electronic Materials (NYSE: WFR  ) 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 personal investing throughout the Great Recession and the recent volatility throughout early August. In this series, 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 MEMC Electronic Materials, ready to evaluate its price, valuation, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, MEMC Electronic Materials is down 37.6% versus an S&P 500 return of 9.1%. Investors in MEMC Electronic Materials 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 MEMC Electronic Materials investing thesis. For historical context, let’s compare MEMC Electronic Materials' 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

MEMC Electronic Materials $6.53 $15.04 $96.10
First Solar (Nasdaq: FSLR  ) $104.13 $175.45 $317.00
LDK Solar (NYSE: LDK  ) $6.30 $15.10 $76.80
KLA-Tencor (Nasdaq: KLAC  ) $35.93 $51.83 $62.70

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

As you can see, MEMC Electronic Materials 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 MEMC Electronic Materials' gross margin over the past five years:

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

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

Next, let's explore what other investors think about MEMC Electronic Materials. We love the contrarian view here at Fool.com, but we don't mind cheating off 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 (% of Float)

MEMC Electronic Materials *** 8.7
First Solar ** 32.6
LDK Solar *** 56.3
KLA-Tencor *** 6.1

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

The Fool community is in the middle of the road on MEMC Electronic Materials. 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 MEMC Electronic Materials' 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 MEMC Electronic Materials' 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.

MEMC Electronic Materials has been taking on some additional debt over the past five years. Even with increasing total equity over the same time period, debt-to-equity has increased. 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. MEMC Electronic Materials is currently above this level, at 58%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If MEMC Electronic Materials 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, MEMC Electronic Materials has a current ratio of 1.60. 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 MEMC Electronic Materials 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 MEMC Electronic Materials.

The final recap

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

In order to do that, I strongly recommend clicking here to add MEMC Electronic Materials to My Watchlist  to help you keep track of all of our ongoing coverage of the company.

Jeremy Phillips does not own shares of the companies mentioned.

Motley Fool newsletter services have recommended buying shares of First Solar. 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 August 25, 2011, at 6:41 PM, prfssr wrote:

    Correct me if I'm wrong, but I see a debt-to-equity ratio of about 30%, not 58%. Am I misreading the chart?

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