What a time it’s been for Lincoln Educational. In the past six months alone, the company’s stock price has increased by a massive 114%, setting a new 52-week high of $53.30 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in Lincoln Educational, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think Lincoln Educational Will Underperform?

Despite the momentum, we don’t have much confidence in Lincoln Educational. Here are three reasons why there are better opportunities than LINC, plus one stock we’d rather own.

1. Weak Growth in Enrolled Students Points to Soft Demand

Revenue growth can be broken down into changes in price and volume (for companies like Lincoln Educational, our preferred volume metric is enrolled students). While both are important, the latter is the most critical to analyze because prices have a ceiling.

Lincoln Educational’s enrolled students came in at 18,702 in the latest quarter, and over the last two years, averaged 13.7% 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 Burn Ignites Concerns

Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Over the last two years, Lincoln Educational’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 4.8%, meaning it lit $4.84 of cash on fire for every $100 in revenue.

3. New Investments Fail to Bear Fruit as ROIC Declines

We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.

Unfortunately, Lincoln Educational’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

Lincoln Educational doesn’t pass our quality test. Following the recent rally, the stock trades at 62.2× forward P/E (or $53.30 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at our favorite semiconductor picks and shovels play.

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