Cabot’s “Already Growing its Earnings 81 Times Faster than Amazon” Stock

What's being teased by Cabot Growth Investor?

By Travis Johnson, Stock Gumshoe, April 24, 2018

This is a quickie, dear friends, because, well, it’s a teaser pitch we’ve covered before.

But I thought it worthwhile to take another quick look — and not just because I actually own the stock (though I’m sure I do pay more attention to stocks I own than to others).

See, this one’s an opportunity to again question the predictions that are made in the teaser ads we see every day — and to remind ourselves that in many cases they’re just words, carefully designed to entice, without any real conviction or analysis behind them.

I know, I know, the more experienced and jaded among you know that’s the truth — but these ads catch the imagination of new investors who seek the next great excitement, too, and they catch the attention of people who don’t know that an almost identical “promise” might have been made last month, or last year.

So what’s the pitch? This is a “The Next Amazon” promise from Cabot Growth Investor… here’s how the ad begins, see if it sounds familiar:

“The Next Amazon

“It’s already growing its earnings 81 times faster than Amazon and has outperformed it by 25% over the past two years.

“Here’s why it could jump 50% on earnings and double soon after that.

“Buy Now!”

Ring a bell? Yes, Mike Cintolo at Cabot Growth Investor has been using that same language to lure subscribers since at least December, when I covered an almost identical pitch.

So… did it jump 50% on earnings? They’ve had one earnings report since then, a “beat” that was well-telegraphed beforehand, and the stock is up about 25% since it was teased… though about half of that gain came before earnings were reported on March 21.

Yes, this is still Five Below (FIVE)… and I do own shares, I think it’s an attractive growth stock because they have the opportunity, if they continue to merchandise well, to both increase same store sales and increase their store count quickly. The market is well aware of that opportunity, other stocks have been in that “sweet spot” of going from regional-to-national before, and FIVE had a phenomenal year in 2017 — so it’s not a cheap stock. Cabot Growth Investor doesn’t even look at “cheap” stocks, I expect, since the underlying strategy behind most of Cabot’s newsletters is to find stocks that are trading with technical strength — which mostly means “they’re going up quickly or consistently.”

And yes, it is possible to find a recent two-year period during which FIVE outperformed AMZN… though you have to do some tinkering to do so, finding a low point for FIVE (and high point for AMZN) like November of 2015 to start. Still, it’s not a completely pointless comparison — Five Below is one of the few retail stocks to mostly keep up with Amazon shares over the past year.

It’s also largely pointless to say that it’s “already growing its earnings 81 times faster than Amazon,” since Amazon is, for better or worse, not a company that focuses on profits — it exists in the bubble of Bezos belief, investors are buying the future and buying revenue growth, they don’t expect Amazon to actually make money.

The 2019 earnings forecast for FIVE jumped by about 20% in the month or two following their November earnings release, mostly because of the tax cut and the (probably related) higher guidance, along with reiterated commentary about their fairly aggressive store building/expansion plans… and since earnings should be the fundamental driver for any stock (Amazon and a few other outliers excepted, of course), it shouldn’t be surprising that the share price also jumped about 20%.

The backdrop for that growth seems well in place, with the store count still increasing by something like 20% each year and juicing huge top-line growth (“top line” just means sales), and they have shown an ability to turn those sales into profits (the “bottom line”) at a steadily improving rate (the profit margin has grown from about 5% to 8% over the past five years). But still, the shares are trading at about 25X next year’s earnings (roughly 30X “current year” earnings forecasts)… so any disappointment will be felt deeply by shareholders.

The risks are many, of course — the primary risk is that this is a tween and teen-focused retailer, relying heavily on fads and trend-driven merchandise that people don’t really need. They do that well, but they depend on steady return traffic as each new trend crests to keep their sales growing, and there’s no guarantee that they’ll hit every trend (last year’s great performance was driven, we’re told, by fidget spinners and mermaid blankets, among other things).

And, like many retailers, they make the vast majority of their money in their fourth quarter — which for them goes from November to the end of January — so almost everything relies on them getting the holiday season right. Which means that investors will probably pay as much attention to forecasts in the next earnings report as they do to the actual reported earnings, since the first quarter won’t likely be a particularly exciting one in terms of actual sales or profits.

The stock has been moving higher of late, partly because of analyst upgrades, and I continue to hold shares, but I’m not expecting the stock to jump by 50% after the next earnings report… and even doubling over the next year is a bit much. Which makes sense, because Cintolo has used that same “jump 50% on earnings and double soon after” language to talk up many stocks — it’s probably not his real expectation for the stock, it’s what the ad copywriters think works to gin up attention.

So really, the important thing is to note that ad copywriters use the language that works to sell their newsletters — not the language that most closely reflects the real analysis of the newsletter writer, or a rational assessment of the probabilities.

By all means, if you like the growth profile, join me in taking a chance on this stock — but don’t do it because you think it’s likely to jump 50% on its next earnings report… which won’t hit for a while, they aren’t expected to report their first quarter until June 1.

In case you’re curious about how I write about the stocks I own when I update the Irregulars in my regular Friday File commentary, here’s what I said after FIVE’s last earnings report in March:

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“Five Below (FIVE) had a great holiday quarter, though the stock price was anticipating that (and the company had already guided investors to expect a “beat”), so the “beat and raise” report didn’t move the stock very much… perhaps because they only raised expectations for the first quarter, and their projected earnings for the year were just in line with what analysts had been expecting.

“I don’t know why we’d have any confidence now about what forecasts are for the critical holiday quarter that doesn’t start for more than six months, but you have to start somewhere — and we’re starting with analysts forecasts of $2.42 for FY2019 (which is underway now, ending next January), so FIVE currently trades at 28X forward earnings… or, if you want to go out a year, as investors will begin to do soon when they use the “forward PE”, almost exactly 20X next year’s earnings.

“That’s pretty solid, still, for a company that is expected to grow earnings by at least 20% a year for the next few years (35% this year), and that is growing both store count and same-store-sales as they expand nationally. The high valuation means the stock will be volatile if expectations change, however, and FIVE is a fad-driven retailer so it’s definitely possible for them to have a terrible quarter if they misjudge or mismarket something. If they do that in a holiday quarter, the stock could easily lose half its value in a matter of days. That’s the price of high-growth speculation… but I do think the company has enough of a track record of strong store openings and strong merchandising that they deserve some level of faith on that front. And they are in a pretty strong position, they have enough scale to be very profitable but they are still quite small, pushing for national expansion and 100+ store openings a year at a time when retail vacancies are a problem and rents should be more manageable (and good locations more available).

“We’ll see, but I’m still happy with my position in this speculative retail stock — they have real growth and a long runway of more growth potential if their stores are as popular in new towns as they have been in their existing areas. I don’t think any festering trade war is likely to be targeted at $5 stuffed animals and mermaid blankets, so this will probably remain a company-specific story: If they keep growing same store sales and keep opening new stores, investors will keep buying the shares. The stop loss price is about $55, so that’s where I’d rethink this one on the downside, and I’m not interested in making this a larger position just yet (it’s close to a 2% portfolio position already), so for now I’m just watching.”

My opinion hasn’t changed in the past month, since nothing of substance has happened to cause me to reconsider. So with that, dear friends, I’ll leave you to chew on the “Next Amazon” yourself… feel free to share your thoughts with a comment below.

I’m on the road over the next couple days attending an investment conference for the Irregulars in Toronto, then the Fairfax Financial Annual Meeting, so articles might be spotty this week.

Disclosure: I own shares of Five Below, Amazon, and Fairfax Financial among the stocks mentioned above. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.

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April 24, 2018 11:23 am

Informative and insightful as always Travis. Cabot’s strategy is largely momentum driven, but even with the Forward P/E of FIVE being at 30.53 the PEG Ratio is only 1.16 which still leaves some room for growth, therefore not inexpensive in the traditional sense but with some value left.

The maximum oscillation between peaks and troughs in the past year (which occurred between early Jan 2018 & early Feb 2018) was 15% when the market per-se pull backed. With Beta at 0.58 was probably somewhat of an exaggerated response, however should it retrace by 15% again from current trading levels it will still be above 200MA. Trading currently above 50MA & 200MA and with RSI at 50 it is probably one of the better opportunities touted by the gurus punting their subscriptions, but 50% growth and rivaling AMZN – maybe not … Leon

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April 24, 2018 11:50 am

A decent stock to be in, but it’s not the next Amazon. If there is to be a next Amazon, it will come from out of nowhere. I wonder if this is the same Cabot letter I subscribed to some 25 years ago?

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April 24, 2018 12:04 pm

All of these Investor Services seem to be a few months late on their BUY recommendations. I could have bought this stock for $56.00 back in October and sold it in April for about $78.00. Not bad……….but for the past week it has spiraled down to $73.00 and still falling !!!!!!!!!!! This happens to me a lot, with
the “Miracle” stock guru. I end up buying high & selling low !!!!!!!! The worst part is I paid good money to some clown for his bad advice !!!!!!!!!!!!

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April 24, 2018 9:55 pm

On that note (previous) comment, how do we found stocks before they take off. Must stocks I see being recommended are up 100% or more already.

April 25, 2018 12:48 am
Reply to  Guest

Hi Guest
Wish there was a simple answer to that – would be alike to having Saturday’s lotto results by Thursday. Keep in following in mind :
* Stocks always go down faster than they go up, but they always go up more than they go down.
* In 95% + of instances when stocks have hit a 52 week high they will go higher beyond that …

The challenge therefore is to identify sound investment stocks with a spread of being momentum, value, dividend or a combination of them driven.
Leon :

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