Cabot’s “Next Amazon” Pitch

By Travis Johnson, Stock Gumshoe, August 15, 2018

This teaser solution originally appeared as part of a Friday File for the Irregulars on December 15. The ads are still running, this time under headlines like “Time to Bet the Farm”, so we’re taking another look, including my updated thoughts following the last quarterly report (I own this one), but most of the teaser solution commentary — and the ad — is unchanged from 12/15/17.

The teaser comes from Mike Cintolo’s Cabot Growth Investor, which is just what it sounds like: a newsletter that picks growth stocks. Cabot’s strategy tends to focus on momentum stocks and rapid growth in most of their newsletters, so the stocks they teaser are often expensive-looking, and this one is touted as “The Next Amazon.”

These are the clues we get:

“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….

“That’s because the company’s low price point products appeal to the fastest growing demographic on the planet: millennials.

“You see …

“Unlike Amazon, which sells everything under the sun, this company has carefully targeted its market to teens, pre-teens and their parents—selling them must-have, in demand, fashionable items along with seasonal must-haves for Easter, Halloween, Christmas and more.

“But time is running out on getting in on the ground floor here.

“As we head into the holidays, orders are starting to pour in from all over the world. The company’s cash register is starting to work overtime.”

So… hoodat? We’re keeping it short and simple on the teaser solution front today, so I’ll just tell you that this must be: Five Below (FIVE)

Which has been trying to essentially ride the dollar store craze while also adding the old “fast fashion” secret sauce from the Target of the 1990s — the stores feature things that cost less than $5, and they focus on seasonal goodies and, well, fad and fashion-driven semi-disposable junk. Like fidget spinners and ugly Christmas sweaters.

And it’s been working — they’re growing fast, they’re expanding the store count rapidly, and analysts see pretty dramatic earnings growth in the 20% neighborhood for as far as the eye can see… the only problem, really, is that they’re expensive. That’s not uncommon for fashionable retailers who are rapidly building out stores and showing dramatic top-line growth, such stocks often get expensive (remember Chipotle?) … and it works as long as it works, as long as those stores can keep getting added without hurting the same store sales growth.

The big benefit for FIVE over the also-somewhat-fashion-driven and successful (but much larger) dollar stores like Dollar Tree or Dollar General is that they have a tiny store count — only about 600 stores now, probably adding 100 or more this coming year, that kind of buildout can create really stupendous top-line growth and cure a lot of ills when it comes to per-store performance… so when per-store performance is also really good, like it was last quarter for FIVE, the leverage for the stock price can be pretty dramatic. In a world that hates retail stocks still, despite the recent recovery of the sector, FIVE is appealing because of that growth: Store count growth, same store sales growth, and huge top-line revenue growth.

It’s still tough to buy a stock like FIVE, because it has run so fast and is trading at a forward PE of about 32, but that growth rate makes it much more reasonable if you can stomach the fashion-driven hits and misses — I don’t know if I’d jump on the stock at all-time highs, but I wouldn’t argue against nibbling a little bit and hoping there’s a little letdown after the Christmas shopping. They don’t report earnings again until March, so things could quiet down for a bit if the market ever takes a little vacation from bullishness.

And to update thing since I wrote the above…

Yes, I did end up buying a position in FIVE, both calls and equity, because of that combination of strong underlying growth and the expected large impact of the tax cuts on their income for 2018. It could be that the tax change alone might increase FIVE’s net income by as much as 20% over what it would otherwise have been. That, I theorized when I bought the shares, could bring the forward PE down from 32 to 27 or so.

And then, last quarter out, Five Below blew out the analyst expectations and raised their forecasts, and the stock surged over $100 and hasn’t looked back. Here’s what I wrote to the Irregulars at the time, back in June:

FIVE is generally lumped into the “dollar store” category, it’s the teen-focused retailer that sells most everything for under $5 and is heavily fad and fashion driven, with a jump in earnings last year from the fidget spinner craze and, more importantly to my investment thesis, a very small footprint that they’re aggressively expanding across the country. I bought shares starting back in December because of the two levers that I thought would be operating on their earnings growth: Taxes and Store growth. They are a major benefic