Should you sell Lowe's (NYSE: LOW) 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 Lowe's, ready to evaluate its price, valuation, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, Lowe's has risen 8.7% versus an S&P 500 return of 11.3%. Investors in Lowe's are perhaps disappointed with their returns, but is now the time to cut and run? Not necessarily. Short-term underperformance alone is not a sell sign. The market may be missing the critical element of your Lowe's investing thesis. For historical context, let's compare Lowe'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

Lowe's $24.86 $28.54 $35.70
The Home Depot (NYSE: HD) $33.48 $37.03 $44.00
Lumber Liquidators Holdings (NYSE: LL) $25.08 $33.41 $33.40
Target (NYSE: TGT) $59.12 $59.80 $70.80

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

As you can see, Lowe's 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 Lowe's valuation. I'm comparing Lowe's recent P/E ratio of 18.5 to where it's been over the past five years.

Lowperatios


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

Lowe's P/E is higher than its five-year average, which could indicate 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, Lowe's looks expensive.

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 Lowe's gross margin over the past five years:

Lowgrossmargins


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

Lowe's is having no trouble maintaining its gross margin, which tends to dictate a company's overall profitability. This is solid news; however, Lowe's 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 Lowe's. 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 once again for context.

Company

CAPS Rating (out of 5)

Short Interest (% of float)

Lowe's *** 0.9
The Home Depot *** 2.0
Lumber Liquidators Holdings **** 24.1
Target *** 1.3

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

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

Here, short interest is at a mere 0.9%. This typically indicates few large institutional investors are betting against the stock.

Now, let's study Lowe'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.

Lowtotaldebttoequity


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

Lowe's has been taking on some additional debt over the past five years. Even with increasing total equity over the same time period, debt to equity has increased, 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. Lowe's is currently below this level, at 29.5%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Lowe's had to convert its current assets to cash in one year, how many times over could the company cover its current liabilities? As of the last filing, Lowe's has a current ratio of 1.34. Lowe's could cover its current liabilities, but it's still below a healthy level of 1.5.

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

The final recap

Lowsellingrecap

Lowe's has failed four of the quick tests that would make it a sell. Does it mean you should sell your Lowe's 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, be 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 mentioned.

Home Depot and Lowe's Cos. are Motley Fool Inside Value picks. Lumber Liquidators Holdings is a Motley Fool Rule Breakers choice. The Fool owns shares of Lowe's Cos. and Lumber Liquidators Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.