Time to Sell Textron?

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

Don't sell on price
Over the past 12 months, Textron has risen 22.6% versus an S&P 500 return of 13.7%. Investors in Textron 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 Textron. For historical context, let’s compare Textron'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:

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

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

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

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

Next, let's explore what other investors think about Textron. 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.

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

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

Here, short interest is at a high 9.6%. This typically indicates that large institutional investors are betting against the stock.

Now, let's study Textron'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.

Textron has done a good job of reducing its debt over the past five years. When we take into account unchanged total equity over the same time period, this has caused debt-to-equity to remain near its 5-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.  Textron is currently above this level, at 186.9%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Textron 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, Textron has a current ratio of 3.31. 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 Textron 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 Textron.

The final recap

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

Remember to add Textron 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.