Selling Himax? Here's What You Need to Know First

Should you sell Himax (Nasdaq: HIMX) today?

The decision to sell a stock you've researched and followed for months or years is never easy. But 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 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 Himax, ready to evaluate its price, valuation, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, Himax is down 38.0% versus an S&P 500 return of 9.1%. Investors in Himax are no doubt 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 Himax investing thesis. For historical context, let’s compare Himax's recent price with its 52-week and five-year highs. I've also included a few other businesses in the same industry or a related one.

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

As you can see, Himax 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 Himax's valuation. I'm comparing Himax's recent P/E ratio of 15.1 with where it's been over the past five years. 

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

Himax's P/E is higher than its five-year average, which could indicate that 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, Himax 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 Himax's gross margin over the past five years:

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

Himax is having no trouble maintaining its gross margin, which tends to dictate a company's overall profitability. This is solid news; however, Himax 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 Himax. 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 portion of our research, 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 rates the stock, and the latter shows what proportion of investors is betting that the stock will fall. I'm including other peer companies once again for context.

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

The Fool community is rather bullish on Himax. We typically like to see our stocks rated at four or five stars. Anything below that level is a less-than-bullish indicator. I highly recommend you visit Himax's stock pitch page to see the verbatim reasons behind the ratings.

Here, short interest is at a mere 0.3%. A number like this typically indicates that few large institutional investors are betting against the stock.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Himax had to convert its current assets to cash in one year, how many times over could it cover its current liabilities? As of the last filing, Himax has a current ratio of 2.10. 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 Himax 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 adding Himax.

The final recap

Himax has failed only 1 of the quick tests that would make it a sell.  This is great, but does it mean you should hold your Himax shares? Not necessarily. Just keep your eye on these trends over the coming quarters.

To do that, I strongly recommend adding Himax to My Watchlist to help you keep track of all of our ongoing coverage of the company.