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

Don't sell on price                                                                     
Over the past 12 months, Republic Services has risen18.1% versus an S&P 500 return of 11.3%. Investors in Republic Services 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 Republic Services. For historical context, let's compare Republic Services' 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

Republic Services $30.49 $32.95 $36.50
Waste Management (NYSE: WM) $35.74 $36.24 $41.20
Stericycle (Nasdaq: SRCL) $69.48 $70.98 $71.00
Waste Connections (NYSE: WCN) $39.66 $40.44 $40.70

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

As you can see, Republic Services is down only a bit from its 52-week high. So even if you bought near the peak, 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 Republic Services' valuation. I'm comparing Republic Services' recent P/E ratio of 30.6 to where it's been over the past five years.


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

Republic Services' P/E is higher than its five-year average, which could indicate the stock is overvalued. A high P/E isn't always a bad sign, since the company's growth prospects may also be increasing alongside the market's valuation. However, it definitely indicates that, on a purely historical basis, Republic Services looks expensive.

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 Republic Services' gross margin over the past five years:


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

Despite some choppy results in 2008, Republic Services is having no trouble maintaining and increasing its gross margin, which tends to dictate a company's overall profitability. This is solid news; however, Republic Services 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 Republic Services.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 (% of Float)

Republic Services 4 1.1%
Waste Management 5 7.4%
Stericycle 2 7.8%
Waste Connections 5 7.1%

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

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

Here, short interest is at a mere 1.1%. This typically indicates few large institutional investors are betting against the stock.

Now, let's study Republic Services' 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.

Republic Services 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 5-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.  Republic Services is currently above this level, at 92.6%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Republic Services 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, Republic Services has a current ratio of 0.52. This is a bad sign for Republic Services. The company's liabilities are currently greater than its assets, which means it could have liquidity issues in the short term.

Finally, it's highly beneficial to determine whetherRepublic Services belongsin 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 Republic Services.

The final recap

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

Remember to add Republic Services 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, but sure to read this article detailing how I missed out on over $100,000 in gains through wrong-headed selling.

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.

Jeremy Phillips does not own shares of the companies mentioned. Stericycle is a Motley Fool Rule Breakers recommendation. Republic Services and Waste Management are Motley Fool Income Investor recommendations. Motley Fool Options has recommended writing a covered straddle position on Waste Management, which is a Motley Fool Inside Valuechoice. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.