Five Below Is Overvalued

Even after this upbeat quarter, institutions continue to dump their positions in Five Below hand over fist.

Apr 24, 2014 at 10:44AM

Five Below (NASDAQ:FIVE) is a specialty retail company that offers a large variety of accessories for five dollars or less. The company was founded in 2002 and went public in August 2012. It rocketed 53% from $17 to $26 on the date of its IPO, and the rally continued as it surged into the $30's soon afterwards. The stock was already recognized as a great growth story and it instantly became a Wall Street darling. But looking across the industry, Five Below trades at an extremely high multiple and its annual revenue growth of only $100 million does not justify its price to earnings ratio. 

Companies like Family Dollar (NYSE:FDO)Dollar General (NYSE:DG), and Dollar Tree (NASDAQ:DLTR) are the closest competitors of Five Below. The primary strength of these three businesses is that they have already captured a massive amount of market share, and will likely maintain their footholds. While there may not be a discernible moat for any of the following companies, it is difficult to erode market share considering the nature of their industry. Some key metrics comparing these four retailers are below: 


Dollar General seems to be the happy medium in the group, and if analyst projections are accurate then this is the best pick. However, fourth quarter results looked dismal, and there doesn't seem to be any major reason for the results. 

That said, Dollar Tree looks more attractive with the highest margins and best valuation. But investors should be wary of the upcoming earnings report as the company missed analyst estimates on both the top and bottom line in the fourth quarter. 

Family Dollar has been facing the greatest market challenges among these corporations. Not only is the PEG extremely unattractive, but analysts are also not expecting any reasonable growth in earnings for the next fiscal year. Income seekers continue to hold their positions for a 2% yield, but the last report simply affirms the company's unattractive fundamentals. 

Five Below's revenue has been growing each quarter year over year, as expected, while it has posted conservative same-store sales. Its comps have been doing OK, but they're not enticing enough for investors. Its profit margin has moved in-line with comparable businesses, sitting at around 6%. Five Below's management has disclosed a long-term growth target of an estimated 2,000 stores throughout the nation, which is good but yet to be reached. It targets a market group that consists of young people in an attempt to avoid direct competition with other cheap retailers. Evidently the store does have a great young atmosphere that appeals to both the child's eye and the parent's wallet. It has also been well recognized for its proficient management, but has yet to designate a new Chief Operating Officer.

Bottom line
Again, the massive premium shown by a trailing P/E of 65 is likely unjustified. For a growth business, a trailing P/E closer to 40 would be much more reasonable. Although Five Below's decent growth will likely continue going forward, I would have to recommend avoiding this business at a price above $38 per share. Instead I would suggest Dollar Tree, which has the strongest return on assets, price to earnings growth, and profit margin in the relative industry. 

The greatest thing Warren Buffett ever said
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Brian Sanders has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers