Time to Sell Middleby?

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

Don't sell on price
Over the past 12 months, Middleby has risen 41% versus an S&P 500 return of 9.1%. Investors in Middleby have every reason to be proud of their returns, but is it time to take some off the top? Not necessarily. Short-term outperformance alone is not a sell sign. The market may be just beginning to realize the true, intrinsic value of Middleby. For historical context, let's compare Middleby'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

Middleby

$77.00

$97.74

$97.74

FMC Technologies (NYSE: FTI  )

$40.71

$50.33

$50.33

Manitowoc (NYSE: MTW  )

$10.68

$23.23

$51.50

Standex International (NYSE: SXI  )

$28.45

$39.11

$39.11

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

As you can see, Middleby 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 Middleby's valuation. I'm comparing Middleby's recent P/E ratio of 18.3 to where it's been over the past five years.

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

Middleby'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, Middleby 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 Middleby's gross margin over the past five years:

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

Middleby is having no trouble maintaining and even growing its gross margin, which tends to dictate a company's overall profitability. This is solid news; however, Middleby 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 Middleby. 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 180,000-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)

Middleby

****

8.3

FMC Technologies

***

5.9

Manitowoc

*****

6.2

Standex International

*****

2.8

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

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

Here, short interest is at a high 8.3%. This typically indicates that large institutional investors are betting against the stock.

Now, let's study Middleby'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.

Middleby has been taking on some additional debt over the past five years. When we take into account increasing total equity over the same time period, this has caused debt-to-equity to remain near its five-year average, as seen in the above chart.  I consider a debt-to-equity ratio below 50% to be healthy, though it varies by industry.  Middleby is currently above this level, at 67%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Middleby 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, Middleby has a current ratio of 1.71. 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 Middleby 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 Middleby.

The final recap

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

In order to do that, I strongly recommend clicking here to add Middleby 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 Middleby, while a separate service has recommended shorting Middleby. 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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