One of the most popular investment strategies rests on finding businesses that can quickly increase their revenue and earnings. By putting money into these opportunities, investors are hoping they can generate strong portfolio returns.
There's one growth stock up 17% in 2025 (as of June 10). That performance trounces the 2% gain of the S&P 500 index (^GSPC 0.56%). But investors might not be familiar with this business, given that it carries a market cap of just $6.8 billion.
Maybe now is a good time to take a closer look. Should you buy this soaring stock and hold it for the long term?
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Succeeding in a competitive market
When mentioning unfavorable traits like low profit margin, no switching costs, low barriers to entry, and constantly changing consumer tastes, investors might decide to avoid the retail sector altogether, which is arguably the most competitive market out there. This setup makes it challenging for companies to find lasting success.
Five Below (FIVE +0.34%) has done this by focusing on a younger demographic with merchandise typically priced below $5. The company's financial momentum is noteworthy. Revenue jumped 19.5% year over year to $970.5 million in the latest fiscal quarter (Q1 2025, ended May 3), beating Wall Street estimates. That top-line gain helped drive a 7.1% increase in same-store sales.
Growth is the key theme for Five Below. The company's store count has expanded at an exciting pace, going from 385 at the end of Q1 2015 to 1,826 as of the latest fiscal quarter.
The long-term objective is to get the store count to 3,500. If Five Below can reach this goal and roughly double its physical footprint, there's no doubt in my mind that its sales and earnings will be substantially higher than they are today. This is exactly what shareholders want.
Dealing with the macro environment
Retailers do extremely well when the broader economy is in strong shape because consumers are inclined to spend more freely in this type of positive environment. This leads to more revenue. Five Below is no different.
However, the company isn't immune to the macro backdrop. I believe there are two important areas for investors to focus on.
The first factor deals with uncertainty surrounding the tariff situation, which is impacting retailers in a profound way. In Five Below's case, the effects appear to be muted right now.
"Our plans include vendor negotiations, diversification of sourcing, continued investment in new value pack product, as well as assortment and pricing adjustments with a focus on reducing the number of price points," said CEO Winnie Park on the Q1 2025 earnings call. Five Below says that it's already reduced goods coming from China by 10%.
The second critical risk factor as it relates to the broader macro environment is the possibility that the U.S. will enter a recession sometime this year. Consumers would surely cut back their discretionary spending, which could hurt demand for Five Below.
NASDAQ: FIVE
Key Data Points
Paying up for growth potential
Investors who still want to buy this stock must be convinced that Five Below will continue to grow its store and revenue base for many years to come. If the conviction is there, then it's important to consider the valuation.
Two months ago, the stock traded at a bargain price-to-earnings ratio of 12.2. Thanks to the stock's huge gain since early April, investors can scoop up shares today at a multiple of 25.8. This isn't a cheap stock anymore.
However, growth-minded investors might still feel like adding Five Below to their portfolios. Just be mindful of the risks mentioned.
