Is Evergreen Solar a Sell?

Should you sell Evergreen Solar (Nasdaq: ESLR) 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 you stock holdings, you can become 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 Evergreen Solar, and I'll evaluate its price, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, Evergreen Solar is down 59.7%, versus a positive S&P 500 return of 11.3%. Investors in Evergreen Solar 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 Evergreen Solar investing thesis. That said, it helps to view the price in historical context. Below, I compare Evergreen Solar'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 for context.

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

As you can see, Evergreen Solar 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 gross margins over time. They represent 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 Evergreen Solar's gross margin over the past five years:

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

Evergreen Solar's gross margin has been choppy over the past five years. Since this figures tend to dictate a company's overall profitability, investors need to keep an eye on it over the coming quarters. If the margin begins to dip, you'll want to know why.

Next, let's explore what other investors think about Evergreen Solar. 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 75,000-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.

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

The Fool community is in the middle of the road on Evergreen Solar. We typically like to see our stocks rated at four or five stars. Anything below that could be a less-than-bullish indicator. I highly recommend you visit Evergreen Solar's stock pitch page to see the verbatim reasons behind the ratings.

Short interest has reached a rather high 10.7%. This typically indicates that large institutional investors are betting against the stock.

Now, let's study Evergreen Solar'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.

Evergreen Solar has been taking on some additional debt over the past two years. When we take into account increasing total equity over the same time period, this has caused debt-to-equity to increase, as seen in the above chart. This is a bad sign, based on the trend alone. The Fool considers a debt-to-equity ratio below 50% to be healthy. Evergreen Solar is currently above this level, at a substantial 112.2%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Evergreen Solar had to convert all of its assets to cash in one year, how many times over could the company cover its liabilities? Evergreen Solar has a current ratio of 4.9. This is a healthy sign. I like to see companies with current ratios above 1.5.

Lastly, it is highly beneficial to determine whether Evergreen Solar 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 Evergreen Solar

The final recap
Evergreen Solar has failed two of my quick tests that would make it a sell. That's great, but does it mean that you should hold your Evergreen Solar shares from here? Not necessarily. Just keep your eye on these trends over the coming quarters.

Remember to add Evergreen Solar to My Watchlist  to help you keep track of all our coverage of the company on Fool.com.

Any suggestions on how I could improve this series? What companies would you like me to cover next? Please leave your comments below.