Sterling Infrastructure, Inc. (NASDAQ:STRL) Stock Rockets 28% As Investors Are Less Pessimistic Than Expected

Sterling Infrastructure, Inc. (NASDAQ:STRL) shares have continued their recent momentum with a 28% gain in the last month alone. The annual gain comes to 138% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Sterling Infrastructure may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 39.2x, since almost half of all companies in the United States have P/E ratios under 19x and even P/E's lower than 11x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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With earnings growth that's superior to most other companies of late, Sterling Infrastructure has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Sterling Infrastructure

Keen to find out how analysts think Sterling Infrastructure's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Sterling Infrastructure's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 77% last year. The strong recent performance means it was also able to grow EPS by 260% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 8.3% per annum over the next three years. That's shaping up to be materially lower than the 11% per year growth forecast for the broader market.

In light of this, it's alarming that Sterling Infrastructure's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Sterling Infrastructure's P/E?

Sterling Infrastructure's P/E is flying high just like its stock has during the last month. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Sterling Infrastructure's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about this 1 warning sign we've spotted with Sterling Infrastructure.

If these risks are making you reconsider your opinion on Sterling Infrastructure, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.