Should You Sell Advanced Battery Technologies Right Now?

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

Don't sell on price
Over the past 12 months, Advanced Battery Technologies is down 6.8% versus an S&P 500 return of 11.3%. Investors in Advanced Battery 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 Advanced Battery Technologies investing thesis. For historical context, let's compare Advanced Battery Technologies' 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

Advanced Battery Technologies $3.59 $4.80 $9.66
A123 Systems (Nasdaq: AONE  ) $8.97 $28.20 $28.20
Ener1 (Nasdaq: HEV  ) $3.68 $7.33 $9.49
Valence Technology (Nasdaq: VLNC  ) $1.15 $1.79 $4.85

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

As you can see, Advanced Battery 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 Advanced Battery Technologies' valuation. I'm comparing Advanced Battery Technologies' recent P/E ratio of 6.8 to where it's been over the past five years.

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


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

Advanced Battery Technologies' P/E is lower than its four-year average, which could indicate the stock is undervalued. This is mostly driven by outsized valuation investors were putting on the company in 2007.

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, Advanced Battery 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 Advanced Battery Technologies' gross margin over the past five years:

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


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

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

Advanced Battery Technologies 3 9.9%
A123 Systems 3 18.6%
Ener1 1 10.6%
Valence Technology 2 13.5%

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

The Fool community is in the middle of the road on Advanced Battery 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 Advanced Battery Technologies' stock pitch page to see the verbatim reasons behind the ratings.

Here, short interest is at a high 9.9%. This typically indicates that large institutional investors are betting against the stock.

Now let's study Advanced Battery 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.


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

Advanced Battery Technologies has taken on very little 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 decrease, as seen in the above chart. Based on the trend alone, that's a great sign. I consider a debt-to-equity ratio below 50% to be healthy, though it varies by industry.  Advanced Battery Technologies currently has no debt on its balance sheet, which (of course) means it has a 0% debt-to-equity ratio. This is great news.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Advanced Battery Technologies had to convert its current assets to cash in one year, how many times over could the company cover its liabilities? As of the last filing, Advanced Battery Technologies has a current ratio of 32.8. This is a healthy sign. I like to see companies with current ratios greater than 1.5.

Finally, it's highly beneficial to determine whether Advanced Battery 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 Advanced Battery Technologies

The recap


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

Remember to add Advanced Battery Technologies to My Watchlist  to help you keep track of all our coverage of the company on Fool.com.

What companies would you like me to cover next in this series? Please leave your comments below.

Jeremy Phillips does not own shares of the companies mentioned. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (13)

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 October 07, 2010, at 2:49 PM, TigerPack1 wrote:

    I have been buying ABAT for the first time the last few days around $3.60.

    Nice round-up and charts of the situation.

    I actually think your two "negatives" in your box at the bottom are actually "positives!" I would rather buy a stock as it remains relatively undiscovered and unloved at a 3-star CAPS rating and ride it to a 5-star rating. The increasing sentiment from investors will translate into new buyers and capital entering ABAT shares. Conversely, the ride from 5-stars to 3 or 2-stars is not much fun!

    Second, the 10% short interest is on the high side for sure, but even shorts are not as negative on ABAT as its competitors. This provides a 100% guaranteed pool of new buying as the price starts to rise, and shorts are forced to cover... This short squeeze action greatly increases your odds for success when buying a stock at the right time!

    So really, ABAT is 6 for 6 in GREEN thumbs based on your above analysis with my two cents added... That's why I have started to accumulate shares.

    I noticed the headline for this story spooked some investors when you posted it, and the market was selling off a little at the same time. You helped knock the price down 4 or 5 cents! Since then, sellers have largely disappeared and ABAT is rising again in price. My supply/demand analysis of ABAT's stock trading is highlighting something of a shortage of shares developing for sale. Any "good" news should propel ABAT higher.

    -TigerPack

  • Report this Comment On October 07, 2010, at 5:54 PM, wittpics wrote:

    The current pe on ABAT is 8.08 and it is 24% below its high.The short interest is 9.83 as of 9-15-10.The volume has been picking up showing buyer interest maybe some shorts covering thier positions.Inventorys were low in august with new order index (a component measure of the pmi) which was 53.1% in august suggests strong growth ahead.Year to date through sep.17th 2010 the S&P Electrical Components & Equiptment index advanced 17.3% vrs. a 1.6% increase in the S&P.2009 Revenues were 63.6 million,operating income 19.5 million,with net income at 21.4million.ABAT had 53 million cash ,158 million in assets, and 5.2 million debt as of 2009. Looks good to me.

  • Report this Comment On October 07, 2010, at 7:47 PM, Clint35 wrote:

    I had shares of ABAT in 2008 before the rally started. I made a pretty good profit on it when I sold. I'd still be holding them if it wasn't for my stupid car needing an expensive repair.

  • Report this Comment On October 07, 2010, at 8:44 PM, paigecoverdale wrote:

    The only reason this stock is not at $5.00 is because of the artificial supply of phantom shares being created by the people shorting this stock because of glam emails telling them to. If they did their homework these short sellers would be terrified by the next quarterly report. America is still not ready for the electric scooter. Gray haired Wall Street investors still think the only legitimate engine is a V8. It's ok, because the other 4 billion inhabitants of this new green planet are. Europe, China and India are munching these scooters up, and the US is finally getting its first order. The real market for these is outside of the US. This company continues to over perform despite the naysayers and glam email shortlists. As profits continue to increase because of how well this company is run (they just blew the last quarter estimates "by expert analysts" out of the water) the ignorant shorts will finally feel the squeeze and be forced out and this stock. With the shorts covering the 6.75 million phantom shares that have created an artificially high supply, they will finally reverse this trend and create an artificially high demand and this company will finally get the P/E of 15 that it deserves. I am staying in until then and then buying back when the shorts are foolish enough to get back in and again reduce the price to artificially low prices.

  • Report this Comment On October 07, 2010, at 9:29 PM, kedarfmk wrote:

    what about A123 system?

  • Report this Comment On October 07, 2010, at 9:56 PM, paigecoverdale wrote:

    ABAT is extremely profitable. They are making boat loads of money. Their capital is 32 times more than their debt. AONE and all of these other wannabe battery companies have one glaring problem, they are losing money, they are not profitable. Why would you invest in companies that are losing a bunch of money every quarter? I would be glad to take a good look at A123 as soon as they have a single profitable quarter. AONE has lost money every single quarter and they are predicted to keep losing money until at least 2012. Ultimately, earnings drive stock prices higher, no matter how many people selling shortlists try to stop them. Look at the steep upwards earnings graph of ABAT's earnings and their rock solid balance sheet and compare it with the pathetic negative earnings (they are losing money!) and weak balance sheets of most of the other lithium battery companies and you will come running back to ABAT. Don't get me wrong, there are some other good lithium battery companies: NEWN and CSGH come to mind, but ABAT is growing and expanding faster than either of them and has more cash on hand.

  • Report this Comment On October 08, 2010, at 1:00 PM, achalhoub wrote:

    I made 14000 dollars with this stock, and i am still holding 8000 shares now. It is the best stock in my portfolio. I bought other stocks that lead me nowhere. As mentioned before, I am happy that this stock is still at 3 stars with rock solid financials and very profitable.Kept it flying under the radar.people shorting this stock are in for a big bad surprise at the end of the quarters. Wait and see.

  • Report this Comment On October 09, 2010, at 5:48 AM, achalhoub wrote:

    embrace the future of electric scooters : http://www.youtube.com/watch?v=izy-VTOPj48

  • Report this Comment On October 13, 2010, at 11:03 PM, ripantuck wrote:

    First, I should state that I own ABAT and do not own any of the other battery makers.

    Next, I have to say that ABAT is not a peer of AONE, HEV or VLNC. They make small and medium sized batteries. The small Lithium battery market for computers, phones, etc. is already an industry. We all have several. In addition they make scooters for which there is a tremendous market in most of Asia, Europe, Africa etc. and they have combined this with making medium sized Lithium batteries. Thus, the profits!

    AONE, HEV and VLNC make large Lithium batteries for cars, buses, military equipment, power grid stabilizers, etc. This is not now a real industry. Thus the lack of profits! They would be unprofitable even if they were run by Bill Gates, Steve Jobs, Warren Buffett or anyone else!

    However, if you read the papers you might have noticed that all the large manufacturers of these vehicles in the world are planning introduction of hybrid and full electric vehicles within a year or two and this is being backed by all major countries' governments. In the U.S., the power grid stabilizer batteries are being tested and will be started into service within the year.The most advanced type of batteries, large and small, are lithium based. Lead acid batteries aren't even in the ballpark for efficiency. Lead acid battery makers will either convert fast, no matter how much money they made last year or they will go the way of harness makers, and soon.

    At least two of these 2 of these (probably all 3) potentially large lithium battery manufacturers are going to grow at an incredible rate, barring world economic collapse. Therefore, looking at past growth, profitability etc.for these companies and comparing them to ABAT is totally ridiculous. You should be trying to figure out which of these has the best technologies and the ability to increase production profitably the quickest. In other words, who has the best patents. the best engineers and the quickest moving and best thingking management.

    Don

  • Report this Comment On October 14, 2010, at 10:43 AM, hall9999 wrote:

    ABAT does make large format batteries. In fact, they say that large batteries get higher margins than small and medium.

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