Time to Sell Ceragon Networks?

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

Don't sell on price
Over the past 12 months, Ceragon has risen 11.1% versus an S&P 500 return of 11.3%. Investors in Ceragon are likely satisfied with their returns, but is now the time to cut and run? Not necessarily. Short-term market-matching return alone is not a sell sign. The market may be missing the critical element of your Ceragon investing thesis. For historical context, let's compare Ceragon's recent price to its 52-week and five-year highs. I've also included a few other businesses across the communications equipment industry:

Company

Recent Price

52-Week High

5-Year High

Ceragon $10.81 $13.29 $21.90
Aviat Networks (Nasdaq: AVNW  ) $4.31 $8.25 $26.30
Sonus Networks (Nasdaq: SONS  ) $2.70 $3.75 $9.03
Alvarion (Nasdaq: ALVR  ) $2.61 $4.28 $15.20

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

As you can see, Ceragon 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 Ceragon's gross margin over the past five years:


 

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

Short Interest (% of Float)

Ceragon 5 2.0
Aviat Networks 3 3.5
Sonus Networks 4 3.1
Alvarion 4 0.9

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

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

Here, short interest has reached a mere 2%. This typically indicates that few large institutional investors are betting against the stock.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Ceragon 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, Ceragon has a current ratio of 4.20. 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 Ceragon 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 Ceragon.

The final recap

Ceragon has failed none of the quick tests that would make it a sell. This is great, but does it mean you should hold your Ceragon shares? Not necessarily. Just keep your eye on these trends over the coming quarters.

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

If you haven't had a chance yet, be sure to read this article detailing how I missed out on over $100,000 in gains through wrong-headed selling.

Jeremy Phillips does not own shares of the companies mentioned. Ceragon Networks is a Motley Fool Hidden Gemspick. 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 04, 2010, at 9:26 AM, eulav wrote:

    so you prefer to see a bullish fool's community to like a stock? That doesn't make any sense to me. If the crowd is overwhelmingly bullish on a name, I would argue that it indicates that upside is limited.

    Wouldnt you rather find a good story which most people hate?

    I would reconsider that criteria, if I were you...

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