Cabot’s “Next Amazon” Pitch

By Travis Johnson, Stock Gumshoe, January 10, 2018

This article originally appeared as part of a Friday File for the Irregulars on December 15. It has been updated slightly with some additions at the end, and to reflect my ownership of these shares, but most of the teaser solution commentary 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 next year. It remains to be seen what the actual impact will be, since we don’t know how FIVE’s accountants will parse the new rules and it’s unclear whether there will be any negatives in the new tax law that accompany the dramatically lower federal tax rate for corporate income… but 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.

That was enough for me to tip the balance and open a position, but not enough to make it a cheap stock. Since then, this week brought negative news — so since I bought shares, FIVE made a little round trip over the past few weeks, soaring 10%+ on holiday optimism and then giving it all back to drop 7-8% or so when they failed to be as optimistic as the Street was apparently hoping.

FIVE is hurting over the past couple days because of their reiteration of guidance and update on the fourth quarter sales prior to their presentation at the ICR conference — the preannouncement was good and optimistic for the quarter that ends at the end of January, but not good enough. They announced that they expect to be near the high end of their guidance range (last updated in the third quarter), so that would be full year earnings per share of something near $1.79 (the range was $1.72-1.79, with 65% of those earnings coming in the fourth quarter). That’s fine, but investors were hoping for more, clearly, and the stocks came back from the low $70s to the mid-$60s.

The tax change won’t come dramatically into play in this next report, and it probably didn’t play much of a role in their updated guidance for the fourth quarter, (since the new rate only applies to earnings after January 1 and, as a retailer, their pre-holiday sales will have presumably been far higher than their post-holiday sales), but it should still allow for some substantial analyst forecast upgrades in future quarters and, I expect, some pretty optimistic guidance from the company. That’s what has me speculating on this one, at least, and we’ll find out over the next few months whether or not I’m right on that.

Over to you, friends — it’s scary to ride a teen-driven fashion story like FIVE, but the store count and same-store-sales growth numbers convinced me. Is it enough to catch your fancy, or is the hefty valuation too much for you? Think they’ll see analyst upgrades in this lower-tax regime, or do you think it’s already baked in? Let us know with a comment below.

Disclosure: I hold both shares and call options on FIVE. I will not trade in the stock for at least three days per Stock Gumshoe’s trading rules, but do have options expiring on January 19 so will likely do something with those shortly after my trading embargo ends.

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14 Comments on "Cabot’s “Next Amazon” Pitch"

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sailor36
Irregular
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Hi Travis, I’m still having trouble logging in. I cleared my cookies, etc as you suggested but it didn’t work. Any further suggestions?

margect
Irregular
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Works on Chrome. Doesn’t work on Internet Explorer, and Norton just cleaned the cache, which was loaded.

upstring
Irregular
47

I noticed that if I click on the login box and than click on top articles or else where on the page it will show me as signed in after

Investor Clouseau
Irregular
98

Super curious to see what $FIVE $options end up in the Real Money portfolio upon next update, I think that’d be the way I’d approach taking a position.

jhsundin
Member
6

Sorry, off the “Panther’s” topic: I’ve tonight been exposed to Roger Scott’s Market Geeks Titan system for which he has a discounted $997 entrevous…..I’ve not seen any Market Geeks info here @ Gumshoevia…..any knowledge out there??

Chuck P
Guest
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I just called my 28 year old daughter who does tons of shopping for clothes and other things as well. We live in Omaha and she has never even heard of this company called Five Below. So for whatever thats worth to you I would venture a guess that this company atleast at this point is somewhat of a unknown company amongst most people.

catherine
Irregular
77
$FIVE (tiny position) Chuck, you’ll know when Five Below makes it to Omaha because they do lots of seasonal advertising on TV, for better or worse. Last summer they were hyping pool noodles, then cool clothes and “stuff” for back to school… I live in the mid-Atlantic area, and stopped into one today to see if they were pushing Valentine’s stuff, or what. There was an area of that, but the St. Patrick’s display was actually larger. They had 16 different Irish themed Tshirts ($5) nicely displayed so you could read the words without touching each pile of shirts. You… Read more »
cdw1
Irregular
0

Any chance you will be looking at the five stocks mentioned in the Casey Research Marijuana Millionaire Summit?

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