Should you sell ATP Oil & Gas (Nasdaq: ATPG) today?

The decision to sell a stock you've researched and followed for months or years is never an easy one. If they fall in love with their stock holdings, investors become vulnerable to confirmation bias -- listening only to information that supports their 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 deepwater driller ATP Oil & Gas and will evaluate its price, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, ATP Oil & Gas is down 17.3% versus an S&P 500 return of 11.3%. Investors in ATP Oil & Gas 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 ATP Oil & Gas investing thesis. For historical context, let's compare ATP Oil & Gas' 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.

Company

Recent Price

52-Week High

5-Year High

ATP Oil & Gas $13.65 $23.97 $57.60
EXCO Resources (NYSE: XCO) $14.87 $22.52 $40.90
Mariner Energy (NYSE: ME) $24.23 $26.32 $37.40
McMoRan Exploration (NYSE: MMR) $17.21 $18.80 $35.50

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

As you can see, ATP Oil & Gas 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 is facing tough times. Here is ATP Oil & Gas' gross margin over the past five years:



Source: Capital IQ, a division of Standard & Poor's; prices in millions.

Despite a stable four years from 2005 to 2009, the company's gross margin dipped more than 10 percentage points in 2009. ATP Oil & Gas 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 ATP Oil & Gas. 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.

Company

CAPS Rating (out of 5)

Short Interest (float)

ATP Oil & Gas 5 53%
EXCO Resources 3 6.2%
Mariner Energy 1 18.1%
McMoRan Exploration 4 14.9%

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

The Fool community is rather bullish on ATP Oil & Gas. 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 ATP Oil & Gas' stock pitch page to see the verbatim reasons behind the ratings.

Short interest is at a sky-high 53%. This typically indicates there are large institutional investors that are betting against the stock.

Now, let's study ATP Oil & Gas' 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.

As fellow Fool Toby Shute highlighted in December, the debt situation at ATP Oil & Gas should be risk-averse investors' primary focus.

The company has taken on significant debt over the past five years. When we take into account increasing total equity over the same time period, this has caused debt-to-equity to decrease, as seen in the above chart. This is a good sign, based on that trend alone. I consider a debt-to-equity ratio below 50% to be healthy, though it varies by industry.  ATP Oil & Gas is currently above this level, at 321.9%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If ATP Oil & Gas had to convert all of its assets to cash in one year, how many times over could the company cover its liabilities? ATP Oil & Gas has an atrocious current ratio of 0.9. This is a bad sign for ATP Oil & Gas. The company's liabilities are currently greater than its assets, which means it could have liquidity issues in the short term.

Finally, it is highly beneficial to determine whether ATP Oil & Gas 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 ATP Oil & Gas.

The final recap


ATP Oil & Gas has failed two of my quick tests that would make it a sell. This is great, but does this mean you should hold your ATP Oil & Gas shares? Not necessarily. Just keep your eye on these trends over the coming quarters, especially the debt line.

What companies would you like me to cover next in this series? Please leave your comments below.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Jeremy Phillips does not own shares of the companies mentioned. Try any of our Foolish newsletter services, free for 30 days. The Motley Fool has a disclosure policy.