Should you sell Corning (NYSE: GLW) 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 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 Corning and will evaluate its price, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, Corning has risen 22.4% versus an S&P 500 return of 11.3%. Investors in Corning 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 Corning. For historical context, let's compare Corning's 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

Corning $18.28 $21.10 $29.60
Cisco Systems (Nasdaq: CSCO) $21.90 $27.74 $34.20
3M (NYSE: MMM) $86.71 $90.52 $97.00
Tyco Electronics (NYSE: TEL) $29.22 $32.98 $41.30

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

As you can see, Corning 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 Corning's valuation. I'm comparing Corning's recent P/E ratio of 9.3 to where it has been over the past five years.


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

Corning's P/E has been choppy over the past four years, but it is lower than its historic 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, Corning 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 Corning's gross margin over the past five years:


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

Despite a recent dip in 2009, Corning has maintained its gross margin fairly well over the past five years. This is solid news; however, Corning investors need to keep an eye on this over the coming quarters. If margins begin to fall, you'll want to know why.

Next, let's explore what other investors think about Corning. 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 (Float)

Corning ***** 1.8%
Cisco Systems **** 0.8%
3M **** 1.1%
Tyco Electronics **** 0.7%

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

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

Short interest is at a mere 1.8%. This typically indicates very few large institutional investors are betting against the stock.

Now, let's study Corning's debt situation, with a little help from the debt-to-equity ratio. This metric tells us how much debt the company has taken on, relative to its overall capital structure.


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

Corning's total debt is around its five-year average. 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. This is a good sign, based on the trend alone. I consider a debt-to-equity ratio below 50% to be healthy, though it varies by industry. Corning is below this level, at 11.5%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Corning had to convert all of its assets to cash in one year, how many times over could the company cover its liabilities? Corning has a current ratio of 4.4. This is a healthy sign. I like to see companies with current ratios above 1.5.

Finally, it is highly beneficial to determine whether Corning 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 Corning.

The recap


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

Remember to add Corning 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. 3M is a Motley Fool Inside Value recommendation. The Fool has written calls (a bull call spread) on Cisco Systems. 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 Fool has a disclosure policy.