Over the past six months, Strategic Education’s stock price fell to $94.99. Shareholders have lost 12.3% of their capital, which is disappointing considering the S&P 500 has climbed by 4.7%. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Strategic Education, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.Even though the stock has become cheaper, we're swiping left on Strategic Education for now. Here are three reasons why you should be careful with STRA and a stock we'd rather own.
Why Do We Think Strategic Education Will Underperform?
Formed through the merger of Strayer Education and Capella Education in 2018, Strategic Education (NASDAQ: STRA) is a career-focused higher education provider.
1. Weak Growth in Domestic Students Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like Strategic Education, our preferred volume metric is domestic students). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Strategic Education’s domestic students came in at 86,533 in the latest quarter, and over the last two years, averaged 6.2% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Cash Flow Margin Set to Decline
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Strategic Education’s cash conversion will slightly fall. Their consensus estimates imply its free cash flow margin of 11.7% for the last 12 months will decrease to 9.8%.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Strategic Education historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.1%, lower than the typical cost of capital (how much it costs to raise money) for consumer discretionary companies.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Strategic Education, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 17.6× forward price-to-earnings (or $94.99 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. Let us point you toward Google, whose cloud computing and YouTube divisions are firing on all cylinders.
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