Top Picks 2017: Five Below

01/27/2017 6:00 am EST

Focus: STOCKS

Douglas Gerlach

President, ICLUBcentral, Inc.

Dollar stores, selling a variety of inexpensive household goods, have been solid growth stories over the past decade, observes Doug Gerlach, editor of Small Cap Informer.

Recently these companies have come under pressure, in part due to rising costs for healthcare and rent. But for the long-term, these stores appeal to millennials, who want to spend less on essentials from soap to paper plates.

Five Below (FIVE), based in Philadelphia, occupies a fast-growing niche in this space. It is our Top Pick for small-cap growth stock investors.

Its sells a dizzy array of merchandise targeted at youngsters costing, as the name suggests, less than $5. About half of sales fall into the leisure category, 30% is fashion and home merchandise and 20% is party and snack goods.

Five Below has plenty of room for growth. From the current base of 500 stores in 31 states, management believes there's room for 2,000 or more stores in the U.S.

The company has little or no presence yet in the West, Southwest except for Texas, and other regions west of the Mississippi River.

Since 2009 sales growth has been almost 37% a year. At its current and potential growth rate, Five Below probably deserves a premium valuation. But we're capping the potential high annual P/E at 30 for the next five years.

We see the stock reaching $76 by 2020, generating annual appreciation of 13.4%, a little short of meeting our expectation of doubling in value over five years but acceptable given today's market valuations. Of course, buying on dips would be optimal to increase the return potential.

Subscribe to Doug Gerlach's Small Cap Informer here...

Click Here for More 2017 Top Stock Picks

Related Articles on STOCKS

Keyword Image
Seasonal Trading in Oil
1 hour ago

Oil companies typically come into favor in mid-December and remain so until late April or early May ...