Money Matters - Simplified

Is CME Group a Sell?

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

Don't sell on price
Over the past 12 months, CME Group is down 5.9% versus an S&P 500 return of 11.3%. Investors in CME Group 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 CME Group investing thesis. For historical context, let's compare CME Group'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:

Company

Recent Price

52-Week High

5-Year High

CME Group $311.02 $353.03 $714.50
IntercontinentalExchange (NYSE: ICE) $116.76 $129.53 $194.90
Nasdaq OMX Group (Nasdaq: NDAQ) $22.63 $23.31 $50.50
NYSE Euronext (NYSE: NYX) $29.05 $34.82 $112.00

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

As you can see, CME Group 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 up, we'll get a rough idea of CME Group's valuation. I'm comparing CME Group's recent P/E ratio of 21.6 to where it's been over the past five years.



CME Group's 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, CME Group 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 CME Group's gross margin over the past five years:


 CME Group is having no trouble maintaining its gross margin, which tends to dictate a company's overall profitability. This is solid news; however, CME Group 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 CME Group. 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

Short Interest (% of Float)

CME Group 3 2.1
IntercontinentalExchange 4 4.0
Nasdaq OMX Group 4 3.5
NYSE Euronext 5 3.6

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

The Fool community is in the middle of the road on CME Group. 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 CME Group's stock pitch page to see the verbatim reasons behind the ratings.

Here, short interest is at a mere 2.1%. This typically indicates few large institutional investors are betting against the stock.

Now, let's study CME Group'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.


 CME Group has been taking on some additional 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. 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.  CME Group is currently below this level, at 12.7%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If CME Group 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 last filing, CME Group has a current ratio of 1.10. CME Group could cover its current liabilities, but it's still below a healthy level of 1.5.

© 2010 UCLICK L.L.C.