Should you sell OmniVision Technologies (Nasdaq: OVTI) 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 OmniVision Technologies, ready to evaluate its price, valuation, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, OmniVision Technologies has risen 67.8% versus an S&P 500 return of 11.3%. Investors in OmniVision Technologies 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 OmniVision Technologies. For historical context, let's compare OmniVision Technologies' 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

OmniVision Technologies $24.62 $25.64 $34.50
Eastman Kodak (NYSE: EK) $4.07 $9.08 $30.90
Tessera Technologies (Nasdaq: TSRA) $18.96 $31.25 $46.40
Avago Technologies (Nasdaq: AVGO) $22.69 $23.69 $23.70

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

OmniVision Technologies is basically at its 52-week high. This means we need to dig into the valuation to ensure that these previously untested highs are justified.

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 is facing tough times. Here is OmniVision Technologies' gross margin over the past five years:



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

OmniVision Technologies is clearly having issues maintaining its gross margin, which tends to dictate a company's overall profitability. OmniVision Technologies investors need to keep an eye on this troubling trend over the coming quarters.

Next, let's explore what other investors think about OmniVision Technologies. We love the contrarian view here at Fool.com, but we don't mind cheating off 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)

OmniVision Technologies **** 12.4
Eastman Kodak ** 17.7
Tessera Technologies *** 6.1
Avago Technologies ** 4.1

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

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

Here, short interest is at a high 12.4%. This typically indicates that large institutional investors are betting against the stock.

Now, let's study OmniVision Technologies' 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.

OmniVision Technologies has been taking on some 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. I consider a debt-to-equity ratio below 50% to be healthy, though it varies by industry. OmniVision Technologies is currently below this level, at 9.3%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If OmniVision Technologies 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, OmniVision Technologies has a current ratio of 4.58. 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 OmniVision Technologies 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 OmniVision Technologies.

The final recap


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

If you haven't had a chance yet, but sure to read this article detailing how I missed out on more than $100,000 in gains through wrong-headed selling.

Jeremy Phillips does not own shares of the companies mentioned.

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