Five Below: Shopping for Growth

03/01/2016 8:00 am EST


Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

Institutional investors will pile into a stock only if it has three characteristics—a proven growth concept, gigantic potential, and a high degree of confidence that growth will be achieved—observes Mike Cintolo, editor of Cabot Top Ten Trader.

Five Below (FIVE) has all three characteristics, which is why the stock is strong and why it could get a lot stronger going forward.

The company is a newer dollar store, with merchandise aimed at teens and pre-teens (sports gear, tech gadgets, arts and crafts, candy, party supplies, decorations, etc.) and everything sells for $5 or less.

The concept has been a hit; earnings have advanced steadily in recent years, from 39 cents per share in 2011 to an estimated $1.05 last year.

This was driven by solid same-store sales growth (38 straight quarters of positive comparable store sales), a growing store count (434 stores at the end of October, up 19% from a year ago), and fantastic unit economics (payback of less than one year on new store openings).

That growth should continue going forward; the holiday season was a good one for Five Below (total sales up 24% in November and December, with same-store sales up 4.1%).

Long-term, management believes there’s room for more than 2,000 stores in the US and that the company can grow sales and earnings at least 20% annually through 2020.

Despite the fundamental growth, FIVE hasn’t done anything since coming public in July 2012.

But that could be changing, as the stock actually bottomed in November and has been pushing higher since, despite the market’s plunge.

The stock recently hit new recovery highs (albeit on sub-par volume), with the relative performance line just shy of a 14-month high.

There is overhead to deal with—and the stock can be a bit choppy—but we like the action and the story. You can buy a little here or (preferably) on weakness. Use a stop near $33.

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