Investor Optimism Abounds Strategic Education, Inc. (NASDAQ:STRA) But Growth Is Lacking

There wouldn't be many who think Strategic Education, Inc.'s (NASDAQ:STRA) price-to-earnings (or "P/E") ratio of 17.9x is worth a mention when the median P/E in the United States is similar at about 18x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Strategic Education has been doing quite well of late. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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Is There Some Growth For Strategic Education?

The only time you'd be comfortable seeing a P/E like Strategic Education's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 221% gain to the company's bottom line. The latest three year period has also seen an excellent 146% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 10% over the next year. That's shaping up to be materially lower than the 15% growth forecast for the broader market.

In light of this, it's curious that Strategic Education's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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.

We've established that Strategic Education currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

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

If you're unsure about the strength of Strategic Education's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.