One of the most powerful stock market trends in 2021 was none other than the rise of meme stocks. Communities began to form on social media sites like Reddit to rally behind individual stocks in hopes of a quick gain. This craze is why businesses like AMC Entertainment and GameStop saw their shares skyrocket a respective 1,250% and 700% in 2021, despite having what most would agree are poor fundamentals.
I think investors would be wise not to dabble in this. Instead, a strategy centered on owning high-quality stocks for the long term is one I fully support. Five Below (FIVE 2.24%), for example, is a top-notch retailer finding remarkable success in the discount space. And based on some outstanding traits, I personally own the stock in my portfolio.
Here's why you should seriously consider this explosive retailer.
Image source: Getty Images.
Carving out a niche in the retail space
While the demise of brick-and-mortar retail is certainly a reality, Five Below has had brilliant success thanks to a focused strategy of catering specifically to discount shoppers. From fiscal 2014 through fiscal 2019 (to exclude pandemic-related temporary store closures in 2020), revenue soared at an annual rate of 22%, while profit increased 29% per year. In addition to these fantastic gains, there are three extremely positive characteristics that make Five Below a stock worth adding to your portfolio.
First, the customer value proposition is unmatched. Targeting tweens (ages 10 to 13), teenagers, and their parents with items primarily under $5, Five Below is known for offering an exciting and vibrant shopping experience. Merchandise that emphasizes trendy and seasonal products encourages repeat visits. The average customer shops at Five Below 10 times per year. As consumers focus more on value in the current inflationary environment, expect a record holiday quarter for the company.
Second, the key to Five Below's expansion strategy is rapidly opening more stores. The business went from 192 locations at the end of fiscal 2011 to 1,173 as of the most recent quarter. That's incredible growth, and it makes complete financial sense given how lucrative its stores are. The average Five Below location generates greater than $2 million in annual sales and costs roughly $300,000 to build. The leadership team has its sights set on 2,500 domestic stores over the long term, which would more than double the current footprint.
Finally, what's probably most astonishing is that Five Below has funded all of its growth by taking on zero long-term debt. It's rare to find a business with a balance sheet as pristine as this one, let alone in the retail sector. Other best-in-breed retailers like Home Depot, O'Reilly Automotive, and Target all carry debt on their respective balance sheets. This makes Five Below management's capital-allocation strategy all the more impressive, even more so given how rapidly the discount-store chain has expanded over the past decade.
You're better off ignoring meme stocks
It's certainly tempting to jump on the meme-stock bandwagon and try to make a quick trading profit based on some news you found on social media. I'm not denying the growing influence of retail investors on the stock market, but this is a very dangerous game to play. Trying to time the market's short-term price movements is a losing proposition, one that could not only hurt your portfolio, but negatively affect your peace of mind.
I urge investors to keep their entire investing focus on assembling a diversified portfolio of great companies. Owning Five Below can help you achieve this goal.
