Time to Sell 8x8?

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Should you sell 8x8 (NAS: EGHT) 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 8x8, ready to evaluate its price, valuation, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, 8x8 has risen 163.0% versus an S&P 500 return of 9.1%.  Investors in 8x8 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 8x8. For historical context, let's compare 8x8'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.

Company

Recent Price

52-Week High

5-Year High

8x8$3.63$5.44$5.44
Cablevision Systems (NYS: CVC) $18.74$38.08$39.80
Cbeyond (NAS: CBEY) $9.54$16.34$46.50
ShoreTel (NAS: SHOR) $7.17$12.00$20.00

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

As you can see, 8x8 is well off 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's facing tough times. Here is 8x8's gross margin over the past five years.

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

8x8 has been able to grow its gross margin, which tends to dictate a company's overall profitability. This is great news; however, 8x8 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 8x8. 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.

Company

CAPS Rating (out of 5)

Short Interest (% of Float)

8x8****12.4%
Cablevision Systems*3.2%
Cbeyond*6.7%
ShoreTel****5.0%

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

The Fool community is rather bullish on 8x8. 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 8x8's stock-pitch page to see the verbatim reasons behind the ratings.

Here, short interest is at a high 12.4%. A number like this typically indicates that 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 8x8 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, 8x8 has a current ratio of 2.09. 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 8x8 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 8x8.

The final recap

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8x8 has failed only one of the quick tests that would make it a sell. Does that mean you should hold your 8x8 shares? Not necessarily. Just keep your eye on these trends over the coming quarters.

To do that, I strongly recommend adding 8x8 to My Watchlist to help you keep track of all of our ongoing coverage of the company.

At the time this article was published Jeremy Phillipsowns no shares of the companies mentioned.  Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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