Time to Sell United Technologies?

Should you sell United Technologies (NYSE: UTX  ) 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 United Technologies, ready to evaluate its price, valuation, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, United Technologies has risen 2.5% versus an S&P 500 return of 9.1%. Investors in United Technologies 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 United Technologies investing thesis. For historical context, let's compare United Technologies' recent price to its 52-week and five-year highs. I've included a few other businesses in the same or related industries:

Company

Recent Price

52-Week High

5-Year High

United Technologies $72.45 $91.83 $91.83
General Electric (NYSE: GE  ) $15.88 $21.65 $42.20
Honeywell International (NYSE: HON  ) $46.88 $62.28 $63.00
3M (NYSE: MMM  ) $82.54 $98.19 $98.20

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

As you can see, United Technologies 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 United Technologies' valuation. I'm comparing United Technologies' recent P/E ratio of 14.0 to where it's been over the past five years.

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

United Technologies' 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, United Technologies 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 United Technologies' gross margin over the past five years:

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

United Technologies is having no trouble maintaining its gross margin, which tends to dictate a company's overall profitability. This is solid news; however, United Technologies 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 United Technologies. 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)

United Technologies 4 0.9
General Electric 4 0.6
Honeywell International 4 0.5
3M 4 1.1

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

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

Here, short interest is at a mere 0.9%. This typically indicates few large institutional investors are betting against the stock.

Now, let's study United Technologies' 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.

United Technologies has been taking on a minor amount of debt over the past five years. When we take into account unchanged 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.  United Technologies is currently below this level, at 47.3%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If United Technologies 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, United Technologies has a current ratio of 1.31. United Technologies could cover its current liabilities, but it's still below a healthy level of 1.5.

Finally, it's highly beneficial to determine whether United Technologies 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 United Technologies.

The final recap

United Technologies 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 United Technologies 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 United Technologies 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 3M. 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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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 26, 2011, at 11:41 AM, prginww wrote:

    Still baffled that the UTC board of directors did not split this stock when it was over 90 a few months ago. Anyone care to elaborate?

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