Five Below FIVE knocked it out of the park with a spectacular first quarter, beating earnings and revenue estimates. The company also raised projections for its second quarter, and for its full fiscal year.
Five Below has gained nearly 50% this year and has climbed over 43% since I declared it a screaming buy on March 10. While I believe the stock has further upside, Five Below is severely overbought, according to its RSI (relative strength index) indicator. Any RSI reading above 70 is considered an overbought signal, but yesterday's closing RSI reading was above 85 (shaded yellow). That's the highest reading in years for this stock.
One of the biggest complaints I hear about Five Below is that it is expensive relative to its peers. If we use valuation as a comparison tool, it's difficult to argue against this point.
Dollar Tree DLTR trades at 11.31x trailing earnings, and 13.01x forward earnings. Dollar General DG has a forward price-to-earnings ratio of 14x anticipated earnings.
Five Below, on the other hand, sports a lofty trailing PE ratio of 54x earnings, and trades at 33x forward earnings.
Since Five Below is considerably smaller and growing at a much faster pace, it deserves a higher valuation. The company has approximately 630 stores and plans to open about 125 new locations in 2018. Five Below mentioned on its conference call that it plans to eventually have 2,500 stores, so there is plenty of growth potential ahead.
Meanwhile, both Dollar Tree and Dollar General currently have over 14,000 locations. Their days of rapid growth are behind them.
I could argue that Five Below isn't even in the same business as those other companies. Walk into your average dollar store, and what will you find? Musty odors, dusty shelves, and low-quality consumer staples aimed at people trying to save a buck. For the most part, dollar stores are pretty sad places.
Five Below is the antithesis of the typical dollar store. Bright colors and fun items surround you. These aren't the same items you'll find in a normal dollar store. Five Below is a great place for young people to wander into and find something that strikes their fancy.
This quarter also should silence those who said the company was living off of the fidget spinner craze. Fads will come and go, and Five Below certainly made the most of that trend while it lasted. According the Five Below's management, fidget spinner sales peaked in late May of last year, just before the end of the school year. Sales of the popular toy dropped sharply soon afterward.
At the time of publication, Ponsi was long FIVE.