Is Gilead Sciences a Sell?

Should you sell Gilead Sciences (Nasdaq: GILD) 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 Gilead Sciences, ready to evaluate its price, valuation, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, Gilead Sciences is down 21.4% versus an S&P 500 return of 11.3%. Investors in Gilead Sciences 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 Gilead Sciences investing thesis. For historical context, let's compare Gilead Sciences' 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, Gilead Sciences 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.

Obviously, one of the primary determinants of Gilead's future is whether it can refresh its product pipeline before its primary revenue drivers, HIV antiviral medications, go generic in 2017. That said, it's still useful for investors to look at some basic metrics and trends behind the business.

Potential sell signs
First up, we'll get a rough idea of Gilead Sciences' valuation. I'm comparing Gilead Sciences' recent P/E ratio of 10.9 to where it's been over the past five years.

Source: Capital IQ, a division of Standard & Poor's. 2007 P/E was not meaningful.

Gilead Sciences' P/E is lower than its five-year average, which could indicate the stock is undervalued. A low P/E isn't always a good sign, since the market may be lowering its valuation of the company because of less attractive growth prospects. It does indicate that, on a purely historical basis, Gilead Sciences looks cheap.

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 Gilead Sciences' gross margin over the past five years:

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

Gilead Sciences is seeing a slight dip in its gross margin, which tends to dictate a company's overall profitability. But the level is still quite high. Still, Gilead Sciences investors need to keep an eye on this over the coming quarters. If margins continue to dip, you'll want to know why.

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

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

The Fool community is rather bullish on Gilead Sciences. 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 Gilead Sciences' stock pitch page to see the verbatim reasons behind the ratings.

Here, short interest is at a mere 2.8%. This typically indicates few large institutional investors are betting against the stock.

Now, let's study Gilead Sciences' 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.

Gilead Sciences took on some additional debt in 2006, but it's been paying it down gradually over the past four years. When we take into account increasing total equity over the same time period, this has caused debt-to-equity to decrease over the past four years, as seen in the above chart. Based on the trend alone, that's a good sign. I consider a debt-to-equity ratio below 50% to be healthy, though it varies by industry.  Gilead Sciences is currently below this level, at 26%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Gilead Sciences had to convert its current assets to cash in one year, how many times over could the company cover its liabilities? As of the last filing, Gilead Sciences has a current ratio of 1.84. This is a healthy sign. I like to see companies with current ratios greater than 1.5.

Finally, it's highly beneficial to determine whether Gilead Sciences 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 Gilead Sciences.

The final recap

Gilead Sciences has failed none of the quick tests that would make it a sell. This is great, but does it mean you should hold your Gilead Sciences shares? Not necessarily. Just keep your eye on these trends over the coming quarters.

Remember to add Gilead Sciences 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, but sure to read this article detailing how I missed out on over $100,000 in gains through wrong-headed selling.