Go To

Is Five Below A Buy After Its Fantastic Fourth Quarter?

Back in early September 2020 I showed you 3 Reasons To Avoid Five Below stock to protect your retirement portfolio.

Today, I give an update after it released its latest quarterly earnings and answer – Is Five Below A Buy After Its Fantastic Fourth Quarter?

You can read the full article above.

But if you don’t want to; here’s a quick recap of why I said to avoid it previously…

***

  1. It’s Got A Lot of Debt
  2. It’s Not Producing Enough Profits and Cash Flow
  3. Five Below Is Expensive

For a discount retail store… Man are Five Below shares expensive.

  • As of this writing its P/E is 70.8.
  • Its P/CF is 39.
  • And its forward P/E is 58.1.

On all three metrics I look to buy investments below 20 to consider them undervalued.

This shows that Five Below is massively overvalued.

And in investing terms this means Five Below stock does not offer you a margin of safety in investing terminology.

When you invest in stocks that are undervalued and have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning its stock in the coming years.

The inverse of this is also true…

When you invest in a stock that is overvalued and without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning its stock going forward.

Why is its stock so overvalued?

Because its share price keeps going up due to people continually buying it… While its profits fall.

When this happens, valuations go up and stocks become expensive.

With Five Below being overvalued it lowers the margin of safety and makes investing in its stock riskier right now.… And it also decreases the investment returns you should expect to own going forward too.

For these reasons I recommend you stay away from Five Below stock.

***

This thesis to avoid investing in Five Below stock because it didn’t meet any of the criteria I require continued to play out after it released its most up to date quarterly earnings a few days ago… Sort of.

  • Fourth quarter 2020 sales rose 24.9% to $687.1 million.
  • Fourth quarter operating income rose 17.7% to $144.1 million.
  • And fourth quarter net income rose 12.3% to $123.9 million.

This is all fantastic and showed great improvement at the end of 2020 during the busy Holiday buying season.

What about the full year?

  • Revenue rose 6.2% to $1.962 billion.
  • Operating profit fell 28.8% to $154.8 billion.
  • And net income fell 29.5% to $123.4 million.

Not good here.  But frankly this is to be expected due to the closures and other effects like unemployment related to the pandemic.

One thing to note above…  Almost 100% of both he operating profit and net profit for the entire year was made during the busy 4th quarter Holiday buying season.

This is how important that period is for retailers…  Especially with store closures and far lower traffic during much of the rest of 2020 due to the pandemic.

Without the Holiday buying rush, Five Below’s numbers would have cratered even more.

Even with the sub-par 2020 full year numbers Five Below’s stock is up 63% since I first told you to avoid it back in early September 2020.

So was I wrong to tell you to avoid it then?

No.

It still falls below the minimum thresholds I require from operating profit and free cash flow production even though these are better.

And while its debt levels are no longer a concern due to its increased profitability – and the fact we look like we’re near the end of this pandemic – its still FAR too overvalued to consider buying.

In fact, it’s about as overvalued now as it was back in September.

Its P/E is now 90.9.

Its P/CF is 30.6.

And its forward P/E is 48.1.

With the stock still being massively overvalued, buying it is extremely risky right now.  And this also means you should expect lower returns owning it going forward.

Because of that I still am good with my recommendation to avoid it back in September.

Again, even though it improved since then… And will continue to improve as we hopefully close out this pandemic.

I want an enormous margin of safety for you because this eliminates risk AND gives you higher investment returns.

I don’t want you to have just one or the other of these things.  I want you to have both.

And that will still require some patience when it comes to Five Below because it’s still too overvalued to buy.

Remain patient and wait to buy Five Below.

And in the meantime, use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

Comments are closed.