This ad sounds very similar to some that we’ve looked at in the past, but readers always want to hear about these “top stock for the year” pitches so I thought I’d give it a look… after all, who doesn’t want an “almost easy double?”
Mike Cintolo is using this spiel to sell his Cabot Growth Investor (currently $99/year), and it’s got a pretty compelling intro — here’s a taste:
“Imagine a small company whose profit profile matches Amazon’s to a T…
“…that’s handed investors 225% profits over the past two years…
“That’s not only beaten the performance of Amazon, Apple, Facebook and Google by over 100% but also distanced the S&P 500 by six times!
“Yet 9 out of 10 investors have never heard of it and it’s set to double investors’ money again in 2019.
“Here’s the full story why it’s my No. 1 Stock for 2019.”
OK, so that narrows it down quite a bit — fewer than 200 reasonable-sized stocks (market cap of $1 billion and up) have returned 225% over two years.
He also says the company has reported four earnings “surprises” in a row, by which he presumably means “better than expected” surprises (worse than expected, of course, is also a “surprise”)… and he says it has a beta of -.09, which is very low for a growth stock (though beta is also calculated lots of different ways, and over different timeframes using different data sets by different providers, so this clue might not be so helpful).
Beta is just a representation of volatility, in case you’re curious — a negative number would mean that it tends to move against the comparison market (usually the S&P 500), and a low number means it moves less abruptly than the market (a beta of “1” would be a stock that matches the market exactly). Berkshire Hathaway, for example, has a five-year beta of about 0.89, which, to oversimplify, means that over the past several years the share price has moved up and down about 90% as much as the market, on average, and in the same direction over time. It’s “less volatile” than the S&P 500, but not dramatically so.
But anyway, more clues?
“12 top analysts have revised the company’s performance not only for 2018 but for 2019 as well.
“So what, exactly, makes this an almost easy double?
“The fact that 9 out of 10 investors have never heard of it and will miss out on this locked-in opportunity.”
That “folks haven’t heard of it so it will double” doesn’t sound so scientific… and it’s hard to say that anything is “locked-in” when it comes to the stock market, but we’ll leave that be for the moment. Any clues about what the company does?
“… 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 near perfect 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.”
Ahhh…. so, sorry to be repetitive here, but this is, again, a tease of Five Below (FIVE), the fast-fashion trend retailer that Mike Cintolo first teased about a year ago (and I’ve owned it for about a year, too). He’s been using essentially that same exact language to pitch the stock since it was in the $60s… including pretty consistently betting that it will jump 50% on earnings and “double from there” — this is the wording from Cabot this time:
“If you can get in at today’s low prices, you could easily see your money jump 50% from Christmas sales and then double again the next two years.”
Five Below has been a richly-valued stock for a while, even after falling a bit from the post-earnings peak, but it’s also growing with compelling speed (it was at 45X earnings when I first bought shares, and has doubled because the earnings have doubled). Most of that growth can be explained by the fact that they have been able to put together a pretty magical combination: Opening new stores really fast, at the same time that their same-store sales are growing really fast.
It’s the new store openings that really drive dramatic revenue and earnings growth, particularly because they’re growing the store count from a small base as they go from being a regional to a national retailer, but it’s the same-store sales growth that gives investors confidence that the business is sustainable — you need both those metrics to be shiny and happy to get a PE of 50+ during a time when everyone says Amazon is eating the world and “retail is dead.”
Five Below also got a bit more attention recently when they opened a flagship store on Fifth Avenue in Manhattan as a “brand marketing” play (no one makes money on those crazy-expensive Fifth Avenue rents, but it gets the story out and helps the image) … so perhaps that will get the Wall Street set paying more attention, but the stock has already tripled in two years so I think most folks who watch retail are already paying attention.
There have been lots of “narratives” that we can weave about why FIVE might continue to succeed, from their nimble merchandising as they surf trends (fidget spinners! Now Mermaits! Star Wars! Emojis!), to their decision to bolster the toy department as Toys R Us stores started closing down, to their “sweet spot” in pricing because they sell essentially everything for $5 and even Amazon doesn’t really want to ship you $5 doodads for free… but whatever the story is that drives belief in the possibility, the fact is that they’ve been growing revenue fast, opening up new stores quickly and turning them profitable very quickly, and they’ve been appealing to fad-driven tween and 20-something buyers for years with fun stores and unique merchandise… and they have only about 700 stores, and they’re not even in a third of the states yet.
I don’t know if it will continue, but I saw enough a year ago to bet on them — and I haven’t sold. That said, there is tremendous risk in the stock over the next few months because almost anything they say about the holiday quarter could drive the shares up or down by 25% in a heartbeat. Like most retailers, FIVE usually gets at least a third of its annual revenue and much more than half of its profit in the November-January months, which also provide the highest margins, so when they next report earnings on November 30 we’ll all be watching to see if they beat the numbers (19 cents/share)… but that quarter is usually a slow one whose numbers don’t mean so much so, more importantly, we’ll be listening closely for any guidance about the holidays quarter.
I think there’s a good chance that FIVE will continue to surprise on the upside, particularly because of the concentrated effort they’re making to build a meaningful presence in California right now and because of their increasing ability to market efficiently as they grow, but a bad holiday season when they get the fashions wrong could bring it all crashing down pretty fast. I think FIVE is still worth a speculation at these prices, but it’s not ever going to be a “safe” double — you have to close your eyes and grimace a little bit to buy a tween-focused retailer at 50X earnings, but I continue to think the growth and the fact that they’ve been getting it really, really right for two years as they grow the store base quickly is worth the risk. FIVE tends to trade in line with all the other high-multiple momentum stocks, so the shares are down a bit over the past month or so… but they ain’t cheap.
Your money, your decision — so what do you think? Ready to bet on more store growth and more fad hits? Think it’s crazy to pay up for a retailer like this? Let us know with a comment below.
P.S. Yes, FIVE’s beta was -.09 or -.10 last month, though it’s back to about 0.5 now… if you think that means its going to be 50% less risky than the market, though, you’re delusional — beta is somewhat useful as a description of volatility over time, but a high-growth fad retailer at 50X earnings is going to be a high risk investment, regardless of what the beta says.
Disclosure: I own shares of both Five Below and Amazon. I won’t trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.