Should you sell Clean Energy Fuels (Nasdaq: CLNE) today?

The decision to sell a stock you've researched and followed for months or years is never an easy one. If they fall in love with their stock holdings, investors become vulnerable to confirmation bias -- listening only to information that supports their 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 Clean Energy Fuels and will evaluate its price, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, Clean Energy Fuels has risen 4.4% versus an S&P 500 return of 11.3%. Investors in Clean Energy Fuels 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 Clean Energy Fuels investing thesis. For historical context, let's compare Clean Energy Fuels' recent price to its 52-week and five-year highs. I've also included a few other businesses in the same or related industries for context.

Company

Recent Price

52-Week High

5-Year High

Clean Energy Fuels

$14.21

$23.70

$23.70

Rentech
(AMEX: RTK)

$0.99

$1.82

$5.50

Fuel Systems Solutions
(Nasdaq: FSYS)

$39.11

$52.53

$61.20

Longwei Petroleum Investment Holding, Ltd.
(AMEX: LPH)

$2.29

$3.28

$3.28

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

As you can see, Clean Energy Fuels 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 Clean Energy Fuels' gross margin over the past five years:



Source: Capital IQ, a division of Standard & Poor's; prices in millions.

Clean Energy Fuels has been able to grow its gross margin, which tends to dictate a company's overall profitability. This is great news; however, Clean Energy Fuels 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 Clean Energy Fuels. 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)

Clean Energy Fuels

****

26.8%

Rentech

***

6.6%

Fuel Systems Solutions

***

46.2%

Longwei Petroleum Investment Holding Limited

*****

1.1%

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

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

Short interest is at a high 26.8%. This typically indicates there are large institutional investors are betting against the stock.

Now, let's study Clean Energy Fuels'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.

Clean Energy Fuels has been taking on a little debt over the past three years, causing debt-to-equity to increase, as seen in the above chart. This is technically a bad sign, based on the trend alone; however, I consider a debt-to-equity ratio below 50% to be healthy, and Clean Energy Fuels is currently way below this level, at 4.3%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Clean Energy Fuels had to convert all of its assets to cash in one year, how many times over could the company cover its liabilities? Clean Energy Fuels has a current ratio of 3.0. This is a healthy sign. I like to see companies with current ratios above 1.5.

Finally, it is highly beneficial to determine whether Clean Energy Fuels 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 Clean Energy Fuels

The final recap


Clean Energy Fuels has failed only two of my quick tests that would make it a sell. This is good news, but does this mean you should hold your Clean Energy Fuels shares? Not necessarily. Just keep your eye on these trends over the coming quarters.

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. Try any of our Foolish newsletter services, free for 30 days.

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.