By Timothy Lutts, Chief Analyst, Cabot Stock of the Week
From Cabot Wealth Advisory 7/4/16 Sign up for Cabot Wealth Advisory—it’s free!
Five Below (FIVE) is a new kind of dollar store, selling common items targeted to teens and pre-teens for $5 or less—stuff like candy, electronic accessories, sports equipment, party and beach supplies, toys, room decorations and even some clothes and sandals. The stock is strong because not only is business good today, but investors are coming around to the view that the company is going to get much, much bigger in the years ahead.
The key here is store-level economics; Five Below’s new stores pay back their initial investment in a year or less (on average), which is allowing for a rapid expansion path. The firm is set to open 85 new stores this year, representing 19% store growth in total, and 15% to 20% store growth is likely for many years. Long-term, the top brass believes there’s room for a whopping 2,000 locations in the U.S., up from 458 at the end of April.
Given that its products aren’t dependent on the economy (they’re cheap, everyday items), success is mostly a matter of staying current on trends and management pulling the right levers.
Note: This stock is in an uptrend today but won’t be forever. So while you could just jump in today and take your chances, what I really recommend is that you get the latest advice of the man who wrote those recommendations over the past few months, Cabot’s own Mike Cintolo. As Senior Growth Analyst, Mike has his pulse on the top-performing stocks of the market every day of the week. His weekly Cabot Top Ten Trader is required reading of all investors/traders looking to get the biggest bang for the buck today, as it ensures that you’re always invested in the market’s hottest, highest-potential stocks. Click here to join today!
As for the current down phase, our Cabot Tides actually flashed a sell signal in mid-December, so we came into 2016 with 45% in cash. And as soon as leading stocks gave up the ghost to start the year, we boosted that north of 60% within one week, and are currently more than 75% in cash.
With so much on the sideline, the goal now is to look for signs of an upcoming market bottom.
More important, I’m looking for individual growth stocks that can lead the next uptrend—stocks that institutional investors will pile into as their growth stories accelerate.
Admittedly, it’s pretty early to have a lot of conviction in which names might lead the next bull move. But I generally like to favor newer names that have great current and projected growth. It also helps if that growth is foreseeable; that’s the type of stock that institutional investors will likely build good-sized positions in when the market finds its footing.
One idea I’m growing more bullish on is Five Below (FIVE), which not only has a great growth story, but also has some defensive characteristics. Here’s what I wrote about FIVE in Cabot Top Ten Trader in mid-January:
“There’s no question that, while the crash in energy prices has many negative effects, it is putting more money in the average person’s pocket. But studies are showing any increased consumer spending has been focused on lower-priced outlets, which is boosting the outlook for Five Below. The company is a newcomer to the dollar store business, offering a variety of goods (fitness apparel, toys and games, technology accessories, beauty products, storage products, sports gear, party supplies and even candy—the focus is on teen and pre-teen customers) from $1 to $5 each. It’s a simple story to understand, and fundamentally, management has done a decent job of executing over the years—sales have generally risen in the mid-20% range, with earnings growing in the 30% range. Growth is likely to slow a bit going forward (mostly because Five Below is bigger), but business is definitely good today; management announced that sales for the last nine weeks of the year rose 24%, including a 4% jump in same-store sales. Moreover, management believes there’s huge potential going forward—it had 434 stores at the end of October, but sees room for 2,000 stores in the long term. During the next few years, Five Below is looking for 20% annual sales and earnings growth through 2020, which seems feasible even if the economy hits a rough spot. This is a good growth story.”
The stock itself bottomed in early December and has actually been trending higher since then, which is very impressive given the market environment. It took a hit in recent days, but found support near its 50-day line. I think FIVE is a great stock for your watch list, though if you want to take a shot, buying a little around here with a tight stop could work if the market finds its footing.
For more updates on Five Below or additional stocks which you can put on your watch list, consider taking a risk-free trial subscription to Cabot Top Ten Trader.
By Timothy Lutts, Editor of Cabot Stock of the Month
from Cabot Wealth Advisory 8/13/12 Sign up for free Cabot Wealth Advisory e-newsletter
So where do you look to find growth today?
IPOs are often a good place to look, particularly if they’re not too popular. Facebook (FB), for example, was hugely popular when it came public, and thus overpriced. Facebook stock is down 50% since then. But take a look at Five Below (FIVE), which came public just a month ago, to little fanfare, and you may find something you like.
Mike Cintolo certainly did, as he mentioned it in last week’s Cabot Market Letter, writing this:
“Five Below (FIVE) is a retailer that targets teens and pre-teens with items priced at $5 or below.
The stores are generally smaller (7,500 square feet) and are profitable very quickly (payback within one year). And Five Below is expanding like mad! It had 200 stores at the end of April, and plans to open 50 more this year and 60 in 2013. Sales, earnings and profit margins are all heading in the right direction, and the stock is crawling higher.”
To elaborate, the IPO priced at 17. On the first day of trading (July 19), it traded between 24 and 29, and it’s closed higher every week since, hitting 34 last Friday before pulling back a bit–with the market–today.
The stock is so young that there are no consensus earnings estimates from analysts, so there’s little question that there’s great potential for perceptions to improve as analysts become aware of the company. Top management previously founded and ran Zany Brainy, and I think the Five Below concept has greater potential because it aims at a larger demographic (the unbrainy) and because the overt focus on low prices–like the very successful dollar chains–broadcasts the bargain proposition clearly.
So, you could just buy the stock today–or later this week–hoping the current pullback is a brief pause in a major uptrend.
But the trend in FIVE is still rather young, and trading volume is a little light, so a better choice would be to take a no-risk trial subscription to Cabot Market Letter, so you can keep up to date on Mike Cintolo’s very best ideas from week to week. Click here.