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

Don't sell on price
Over the past 12 months, Citrix Systems has risen 78% versus an S&P 500 return of 11.3%. Investors in Citrix Systems 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 Citrix Systems. For historical context, let's compare Citrix Systems' recent price with 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

Citrix Systems $70.26 $71.93 $71.90
Blue Coat Systems (Nasdaq: BCSI) $27.41 $36.25 $53.40
VMware (NYSE: VMW) $85.76 $89.18 $125.30
LogMeIn (Nasdaq: LOGM) $46.28 $46.72 $46.70

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

Citrix Systems is basically at its 52-week high. This means we need to dig into the valuation to ensure that these new highs are justified.

Potential sell signs
First up, we'll get a rough idea of Citrix Systems' valuation. I'm comparing its recent P/E ratio of 49.1 with where it has been over the past five years.

Ctxsperatios
 

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

Citrix Systems' 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, because the company's growth prospects may also be increasing alongside the market's valuation. However, it definitely indicates that, on a purely historical basis, Citrix Systems 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 Citrix Systems' gross margin over the past five years:

Ctxsgrossmargins


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

Citrix Systems isn't having any trouble maintaining its gross margin within a range of 3 percentage points, which tends to dictate a company's overall profitability. This is solid news; however, Citrix Systems investors need to keep an eye on this over the coming quarters. If margins begin to drop, you'll want to know why.

Next, let's explore what other investors think about Citrix Systems. 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 rates 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)

Citrix Systems ** 2.8
Blue Coat Systems *** 10.6
VMware *** 8.1
LogMeIn *** 17.4

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

The Fool community is rather bearish on Citrix Systems. 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 Citrix Systems' 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 Citrix Systems' debt situation, with a little help from the debt-to-equity ratio. This metric tells us how much debt the company has taken on, relative to its overall capital structure.

Ctxstotaldebttoequity


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

Citrix Systems has done a good job of reducing its debt from 2005 to zero. Combine this with increasing total equity, and that's a fantastic sign.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Citrix Systems 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 latest filing, Citrix Systems has a current ratio of 1.56. 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 Citrix Systems 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 Citrix Systems.

The recap

Ctxssellingrecap

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

Remember to add Citrix Systems 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 more than $100,000 in gains through wrong-headed selling.

Jeremy Phillips does not own shares of the companies mentioned.

VMware is a Motley Fool Rule Breakers selection. 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.