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Should You Sell Dow Chemical Today?

By Jeremy Phillips - Updated Apr 6, 2017 at 10:19PM

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We're seeking danger signs among Fools' most beloved stocks.

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

Don't sell on price
Over the past 12 months, Dow has risen 18.4% versus an S&P 500 return of 13.7%. Investors in Dow 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 Dow. For historical context, let’s compare Dow'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

Dow $36.93 $39.00 $48.00
Johnson & Johnson (NYSE: JNJ) $60.02 $66.20 $72.80
3M (NYSE: MMM) $92.94 $94.64 $97.00
DuPont (NYSE: DD) $54.11 $56.52 $56.50

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

As you can see, Dow 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, 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 Dow's gross margin over the past five years:

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

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

Short Interest (% of Float)

Dow **** 1.4
Johnson & Johnson **** 0.9
3M **** 1.1
DuPont **** 1.0

Sources: Capital IQ (a division of Standard & Poor's) and Motley Fool CAPS.

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

Here, short interest is at a mere 1.4%. This typically indicates few large institutional investors are betting against the stock.

Now, let's study Dow'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.

Dow 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. Dow is currently above this level, at 105.2%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Dow 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, Dow has a current ratio of 1.71. This is a healthy sign. I like to see companies with current ratios equal to or greater than 1.5.

Finally, it’s highly beneficial to determine whether Dow 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 Dow.

The final recap

Dow has failed one of the quick tests that would make it a sell. This is great, but does it mean you should hold your Dow shares? Not necessarily. Just keep your eye on these trends over the coming quarters.

Remember to add Dow 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 over $100,000 in gains through wrong-headed selling.

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Stocks Mentioned

DuPont de Nemours, Inc. Stock Quote
DuPont de Nemours, Inc.
DOW
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$182.29 (1.46%) $2.63
3M Company Stock Quote
3M Company
MMM
$134.33 (3.21%) $4.18
E. I. du Pont de Nemours and Company Stock Quote
E. I. du Pont de Nemours and Company
DD

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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