Should you sell Sequenom (Nasdaq: SQNM) 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 Sequenom, ready to evaluate its price, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, Sequenom has risen 115.7% versus an S&P 500 return of 11.3%. Investors in Sequenom 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 Sequenom. For historical context, let's compare Sequenom'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:

Company

Recent Price

52-Week High

5-Year High

Sequenom $7.01 $8.65 $29.10
Myriad Genetics (Nasdaq: MYGN) $16.41 $27.52 $88.40
DexCom (Nasdaq: DXCM) $13.22 $14.18 $26.70
Luminex (Nasdaq: LMNX) $16.00 $18.24 $27.00

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

As you can see, Sequenom is down substantially 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 Sequenom's gross margin over the past five years:


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

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

Sequenom 3 28.0
Myriad Genetics 4 5.9
DexCom 1 7.7
Luminex 4 6.5

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

The Fool community is in the middle of the road on Sequenom. 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 Sequenom's stock pitch page to see the verbatim explanations behind the ratings.

Here, short interest is at a high level of 28%. This typically indicates that large institutional investors are betting against the stock.

Now, let's study Sequenom'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.

Sequenom has been taking on a small amount of 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 increase, as seen in the above chart. Based on the trend alone, that's a bad sign, but given the small amounts involved, there's little to worry about here. I consider a debt-to-equity ratio below 50% to be healthy, though it varies by industry. Sequenom is currently below this level, at a fantastic 5.6%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Sequenom 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, Sequenom has a current ratio of 1.45. Sequenom could cover its liabilities, but it's not quite at the healthy level of 1.5 that we like to see.

Finally, it's highly beneficial to determine whether Sequenom 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 Sequenom.

The final recap

Sequenom has failed three of the quick tests that would make it a sell. Does it mean you should sell your Sequenom shares today solely because of this? Not necessarily, but keep your eye on these trends over the coming quarters.

Remember to add Sequenom 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.

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. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.