On Tuesday, March 29, the U.S. Treasury yield curve briefly inverted, with two-year bonds offering a higher interest rate than 10-year bonds. This type of situation is a sign that investors are more worried about the economy in the near term than over the long term, and therefore they demand a better yield for the perceived level of heightened risk. What's more, it usually foreshadows an upcoming recession within the following 12 months.
From an investing perspective, finding companies that do well in an adverse economic scenario is a smart move to help you protect your portfolio. Booming discount-retailer Five Below (FIVE 1.55%), which just posted year-over-year revenue growth of 45.2%, is a business that should be on your radar right now.
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Stretching budgets
As its name suggests, Five Below primarily sells products below $5. Customers can shop at the company's 1,190 nationwide stores for a broad assortment of merchandise, ranging from tech gadgets and beauty products to apparel and pet supplies. If a recession were to happen, it's not difficult to understand why consumers might flock to Five Below stores as they stretch their budgets in search of value.
When asked on the fourth-quarter 2021 earnings call about how the business would fare in a possible downside scenario, particularly in light of the recent geopolitical turmoil and rising U.S. interest rate environment, CEO Joel Anderson gave a response that should help investors sleep well at night.
"Every time there's been some consumer setback, take '08 as an example, Five Below has been a winner in that. And I see no reason why that wouldn't be the case this time as well."
He goes on to highlight that even when times are tough on consumer wallets, parents are hesitant to cut back spending on their children around special occasions like birthdays and holidays. This clearly benefits Five Below, as it specifically targets a younger demographic.
Operating using a customer-centric culture, and offering a vibrant shopping environment with a wide range of in-demand and trendy products, results in a situation where Five Below becomes a top destination no matter what the economy is doing.
All-weather appeal
To be clear, Five Below isn't a business to own just as a defensive play because it lacks growth potential. In fact, the exact opposite is true. From fiscal 2011 through fiscal 2021, the company has increased annual revenue and operating income tenfold and fifteenfold, respectively. That's truly outstanding growth during a stretch when the U.S. economy was expanding (besides the coronavirus-induced recession).
And management just introduced a "triple-double" strategy that should excite investors. The plan is to have a total of 3,500 stores by 2030, roughly triple the current count. And by 2025, Five Below's revenue and earnings per share are expected to double.
A larger store footprint translates to higher sales, expanding margins, and more profit. And for investors, this means a stock that is set to continue crushing the market in the years ahead. During the last five years, Five Below's shares have produced a remarkable 261% return, much better than the S&P 500's 110% gain. And that's despite losing 23% so far this year.
Five Below's business performs extremely well in robust economic times as well as during recessions. And this easily makes it a worthy all-weather stock for your portfolio, especially with all of the macroeconomic uncertainty these days.
