Buy Five Below Thirty-Five

Five Below (FIVE) is the hottest little dollar store around, and I think its FIVE is a good buy — and worth a try — below $35. If you’re not familiar with Five Below, it’s a dollar store that sells everything between $1 and $5. Five Below a hot-spot for teenagers who load up on party supplies, makeup, and gadgets for their room.

FIVE began operations in 2002, went public in 2012, and has over 304 stores in operation now — up 25% year-over-year — with plans to grow to 2000 someday. This is in my opinion the best dollar store stock to own, but lots of investors know this, and thus the stock’s always overvalued. Let’s take a look:

One Year Chart

2QtrsAgo management lowered earnings guidance a tad and that caused FIVE to fall off its perch. That’s good because FIVE was too high and needed to come down for me to get some. Unfortunately, the company only grew profits 21% last quarter, as sales increased 22%. So buying in around 45 times earnings still seems high.

I love the estimated long-term growth rate of 31%. From 300 stores to 2000 ? It would be nice to ride along with that stock as it happens.

Fair Value

I’m being very generous here giving FIVE a Fair Value of 40 times earnings. High multiple stocks have been getting hit hard here the past month, as investors have appreciated dividend paying Blue Chips recently. Also, the stock market is also in a nasty correction. So we may soon have an opportunity to get FIVE below $35, but from the looks of the chart the stock seems to bounce higher once it gets to that level.

Sharek’s Take

Five Below is a stock I really need to get into — at the right price. But honestly, the stock’s got a Fair Value of $36 so getting in at $35 doesn’t sound that great. I could be sitting on the stock a year and get nothing out of it. I’ll continue to keep FIVE on my radar. Dollar stores haven’t been performing well this year, and maybe some bad news will push FIVE below thirty-five and I can get in at a discount.