Further Upside For Douglas Elliman Inc. (NYSE:DOUG) Shares Could Introduce Price Risks After 25% Bounce

Douglas Elliman Inc. (NYSE:DOUG) shareholders have had their patience rewarded with a 25% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 26% over that time.

Even after such a large jump in price, Douglas Elliman may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 13x, since almost half of all companies in the United States have P/E ratios greater than 16x and even P/E's higher than 31x 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 limited.

As an illustration, earnings have deteriorated at Douglas Elliman over the last year, which is not ideal at all. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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 out of favour.

View our latest analysis for Douglas Elliman

Although there are no analyst estimates available for Douglas Elliman, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Douglas Elliman would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 65%. Still, the latest three year period has seen an excellent 267% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

This is in contrast to the rest of the market, which is expected to grow by 6.0% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Douglas Elliman's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Key Takeaway

Douglas Elliman's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Douglas Elliman currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Douglas Elliman, and understanding them should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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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.