Should you sell Continucare (AMEX: CNU) 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 Continucare, ready to evaluate its price,valuation, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, Continucare has risen 38.6% versus an S&P 500 return of 11.3%. Investors in Continucare 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 Continucare. For historical context, let's compare Continucare's recent price to its 52-weekand 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

Continucare $4.20 $5.25 $5.25
UnitedHealth Group (NYSE: UNH) $35.11 $36.07 $64.60
WellCare Health Plans (NYSE: WCG) $28.96 $39.12 $128.40
IPC The Hospitalist (Nasdaq: IPCM) $27.30 $38.50 $38.50

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

As you can see, Continucare 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 Continucare's valuation. I'm comparing Continucare's recent P/E ratio of 10.0 to where it's been over the past five years.



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

Continucare's P/E is lower than its five-year 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, Continucare 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 is facing tough times. Here is Continucare's gross margin over the past five years:



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

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

Continucare 5 3.2%
UnitedHealth Group 4 1.2%
WellCare Health Plans 3 9.8%
IPC The Hospitalist 4 10.0%

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

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

Here, short interest is at a mere 3.2%. This typically indicates few large institutional investors are betting against the stock.

Now, let's study Continucare'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.

Continucare has done a good job of reducing its debt to essentially nothing over the past five years. That's a great sign. I consider a debt-to-equity ratio below 50% to be healthy, though it varies by industry. Continucare is currently below this level, at a measly 0.2%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Continucare 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, Continucare has a current ratio of 5.74.This is a healthy sign. I like to see companies with current ratios greater than 1.5.

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

The final recap



Continucare has failed none of the quick tests that would make it a sell. This is great, but does it mean you should hold your Continucare 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.

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. Motley Fool Options has recommended a diagonal call position on UnitedHealth Group, which is a Motley Fool Inside Value selection and a Motley Fool Stock Advisor pick. The Fool owns shares of UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.