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

Don't sell on price
Over the past 12 months, Consolidated Edison has risen 11.8% versus an S&P 500 return of 13.7%. Investors in Consolidated Edison perhaps disappointed with their market-matching 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 Consolidated Edison investing thesis. For historical context, let's compare Consolidated Edison'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

Consolidated Edison

$50.09

$51.35

$52.90

Southern (NYSE: SO)

$37.84

$38.79

$40.60

Exelon (NYSE: EXC)

$40.20

$44.52

$92.10

PG&E (NYSE: PCG)

$44.06

$48.63

$52.20

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

Consolidated Edison is basically at its 52-week high. This means we need to dig into the valuation to ensure that these new highs are justified.

Potential sell signs
First up, we'll get a rough idea of Consolidated Edison's valuation. I'm comparing Consolidated Edison's recent P/E ratio of 14.4 to where it's been over the past five years.

Edperatios

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

Consolidated Edison'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, Consolidated Edison 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 Consolidated Edison's gross margin over the past five years:

Edgrossmargins

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

Consolidated Edison has been able to grow its gross margin, which tends to dictate a company's overall profitability. This is great news; however, Consolidated Edison 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 Consolidated Edison. 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 (out of 5)

Short Interest (% of Float)

Consolidated Edison

***

2.5

Southern

*****

0.8

Exelon

*****

1.9

PG&E

***

0.6

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

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

Here, short interest is at a mere 2.5%. This typically indicates few large institutional investors are betting against the stock.

Now, let's study Consolidated Edison'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.

Edtotaldebttoequity

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

Consolidated Edison has been taking on some additional 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 remain near its five-year average, as seen in the above chart. I consider a debt-to-equity ratio below 50% to be healthy, though it varies by industry.  Consolidated Edison is currently above this level, at 94.8%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Consolidated Edison 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, Consolidated Edison has a current ratio of 1.48. Consolidated Edison could cover its current liabilities, but it's still below a healthy level of 1.5.

Finally, it's highly beneficial to determine whether Consolidated Edison 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 Consolidated Edison.

The final recap

Edsellingrecap

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

Remember to add Consolidated Edison 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.

Jeremy Phillips does not own shares of the companies mentioned.

Exelon is a Motley Fool Inside Value selection. Southern is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended a covered strangle position on Exelon. 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.