Should you sell Waste Management (NYSE: WM) today?

The decision to sell a stock you've researched and followed for months or years is never easy. But 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 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 Waste Management, ready to evaluate its price, valuation, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, Waste Management has risen by 15.7% versus an S&P 500 return of 11.3%. Investors 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 Waste Management. For historical context, let's compare its recent price with its 52-week and five-year highs. I've also included a few other businesses in the same industry or a related one.

Company

Recent Price

52-Week High

5-Year High

Waste Management $36.61 $37.25 $41.20
Republic Services (NYSE: RSG) $30.74 $32.95 $36.50
Stericycle (Nasdaq: SRCL) $71.90 $72.67 $72.70
Waste Connections (NYSE: WCN) $41.00 $41.68 $41.70

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

Waste Management is basically at its 52-week high, so we need to dig into the valuation to ensure that these previously untested highs are justified.

Potential sell signs
First up, we'll get a rough idea of Waste Management's valuation. I'm comparing Waste Management's recent P/E ratio of 17.7 with where it's been over the past five years.


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

Waste Management's P/E is higher than its five-year average, a possible indication that the stock is overvalued. A high P/E isn't always a bad sign, since the company's growth prospects may also be increasing alongside the market's valuation. However, it definitely indicates that, on a purely historical basis, Waste Management looks expensive.

Now let's look at the gross-margin 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's Waste Management's gross margin over the past five years.


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

Waste Management is having no trouble maintaining its gross margin, which tends to dictate a company's overall profitability. This is solid news; however, Waste Management investors need to keep an eye on this metric over the coming quarters. If margins begin to dip, you'll want to know why.

Next, let's explore what other investors think about Waste Management. 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 portion of our research, 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 rates the stock, and the latter shows what proportion of investors is 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)

Waste Management 5 7.6
Republic Services 4 0.9
Stericycle 2 7.5
Waste Connections 5 6.8

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

The Fool community is rather bullish on Waste Management. We typically like to see our stocks rated at four or five stars. Anything below that level is a less-than-bullish indicator. I highly recommend you visit Waste Management's stock-pitch page to see the verbatim reasons behind the ratings.

Here, short interest is at a high 7.6%. A number like this typically indicates that large institutional investors are betting against the stock.

Now let's study Waste Management'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.

Waste Management's total debt is around its five-year average, as is its total equity. As a result, debt-to-equity has remained near its five-year average and within a 6-percentage-point range, as the above chart shows. I consider a debt-to-equity ratio below 50% to be healthy, though the number can vary by industry. Waste Management is currently above this level, at 157.8%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Waste Management had to convert its current assets to cash in one year, how many times over could it cover its liabilities? As of the last filing, the company has a current ratio of 1.10. Waste Management could cover its liabilities, but it's still below a healthy level of 1.5.

Finally, it's highly beneficial to determine whether Waste Management 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 adding Waste Management.

The final recap


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

Remember to add Waste Management to My Watchlist to help you keep track of all our coverage of the company on Fool.com.

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

Jeremy Phillips owns no shares of the companies mentioned. 

Waste Management is a Motley Fool Inside Value selection. Stericycle is a Motley Fool Rule Breakers pick. Republic Services and Waste Management are Motley Fool Income Investor selections. Motley Fool Options has recommended a write covered straddle position on Waste Management. 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.