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

Don't sell on price
Over the past 12 months, Marathon Oil has risen 55.9% versus an S&P 500 return of 13.7%. Investors in Marathon Oil 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 Marathon Oil. For historical context, let's compare Marathon Oil'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

Marathon Oil

$51.17

$54.19

$67.00

ExxonMobil (NYSE: XOM)

$83.44

$88.23

$96.10

Chevron (NYSE: CVX)

$104.88

$109.94

$109.90

ConocoPhillips (NYSE: COP)

$78.28

$81.80

$96.00

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

As you can see, Marathon Oil 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 Marathon Oil's valuation. I'm comparing Marathon Oil's recent P/E ratio of 13.9 to where it's been over the past five years.

Mroperatios

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

Marathon Oil'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, Marathon Oil 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 Marathon Oil's gross margin over the past five years:

Mrogrossmargins

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

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

Next, let's explore what other investors think about Marathon Oil. 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)

Marathon Oil

*****

1.3

ExxonMobil

****

0.5

Chevron

****

1.2

ConocoPhillips

*****

0.7

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

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

Here, short interest is at a mere 1.3%. This typically indicates few large institutional investors are betting against the stock.

Now, let's study Marathon Oil'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.

Mrototaldebttoequity

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

Marathon Oil 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. Marathon Oil is currently below this level, at 33.2%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Marathon Oil 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, Marathon Oil has a current ratio of 1.24. Marathon Oil could cover its current liabilities, but it's still below a healthy level of 1.5.

Finally, it's highly beneficial to determine whether Marathon Oil 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 Marathon Oil.

The final recap

Mrosellingrecap

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

Remember to add Marathon Oil 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.

Chevron is a Motley Fool Income Investor selection. The Fool owns shares of ExxonMobil. 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.