3 Reasons Five Below Is a Must-Buy for Long-Term Investors

Source The Motley Fool

Five Below (NASDAQ: FIVE) is a retail chain of 1,749 locations as of the end of the third quarter of 2024. The chain is popular with teen and preteen shoppers who are looking to get trending products at cheap prices. And the stock is a must-buy for long-term investors. I believe that they will want to own Five Below stock through at least 2030, if not beyond.

And to support this belief, I'll share some thoughts from some of the greatest long-term investors of all time: Peter Lynch, Warren Buffett, and Charlie Munger.

Start Your Mornings Smarter! Wake up with Breakfast news in your inbox every market day. Sign Up For Free »

Peter Lynch: "Buy what you know"

This past holiday season, there was one place that my kids and my friends' kids wanted to go shopping for gifts: Five Below. This isn't reason enough to invest in a stock. But in the words of Peter Lynch, a good way to start investing is to "Buy what you know."

For me, Five Below has gone from a brand that I only saw when traveling, to a chain with a store about 30 minutes away, to a company with a store in my hometown. At the end of 2019 -- only five years ago -- it had 900 locations.

It has nearly doubled since then. If it seems like I'm seeing it more these days, it's because I am.

At its investor day presentation in 2022, management said that it anticipates having more than 3,500 locations someday. Perhaps some investors believe this number is too high to be achievable. But even so, the company could open new locations at a brisk pace of 100 stores annually through 2030 and still not come close to its stated goal.

Lynch famously invested in many retail and restaurant concepts when they were in expansion mode, like Five Below is. These consumer-facing businesses were good opportunities, and it's why I think Lynch might have been intrigued with Five Below's expansion if he were still professionally managing money today.

Warren Buffett: "Never lose money"

I believe it's unlikely that long-term investors will lose money with Five Below stock. And that would be music to Warren Buffett's ears. His top investing rule is to never lose money. And his second rule is to always remember the first rule.

As Lynch often pointed out, a stock's price is strongly correlated with a company's earnings over the long term. Therefore, if profits go up, the stock price will likely go up as well. I believe investors will make money in Five Below stock because its earnings will almost certainly go up.

According to management, Five Below stores have a payback period of about one year. This means that if it costs $400,000 to open a new store, that store should profit $400,000 in its first year of being open. In subsequent years, overall profits increase because the investment is already paid off.

This is exactly what's happened with Five Below over the last five years. Its earnings per share (EPS) are up more than 50%, as the chart below shows.

FIVE Revenue (TTM) Chart

FIVE revenue (TTM), data by YCharts; TTM = trailing 12 months.

Granted, its revenue has doubled during this time -- so ideally EPS would be up by a greater amount. But the point remains: Five Below's profits are going up, which is the fundamental catalyst the stock needs to go up.

Charlie Munger: "The big money ... is in the waiting."

I can almost hear the detractors now: "Five Below's earnings are up more than 50% in the last five years, but the stock price is down 18% during this time, and it's down more than 60% from its all-time high." Of course, that's true. And investing great Charlie Munger was the first to point out that top stocks pull back 50% or more regularly.

Zooming out, Five Below stock was outperforming the S&P 500 from the beginning of 2020 through early 2024 -- that's the long term. By contrast, its underperformance is a short-term problem. The company is facing headwinds such as turnover in key management positions as well as a modest decline in same-store sales.

Munger would encourage investors to not react emotionally to Five Below's recent drawdown. If it's a good business, and I believe it is, then it will rebound as its earnings continue to climb.

Perhaps Munger's most famous quote is that "The big money is not in the buying or the selling but in the waiting." And I think that will be true here. I don't believe it's unreasonable to expect the company's profits to double between now and 2030, as it continues to expand. And considering it's debt-free, management will either funnel those profits into new opportunities for growth or give them back to shareholders.

In conclusion, Five Below is a growing, consumer-facing business like the ones that Peter Lynch used to look for. It has a clear path to earnings growth, making it unlikely to lose money, which is Buffett's top rule. And considering its cheap stock price and solid financials, it's one to calmly hold for the long term, as Munger suggested, so that the big investment gains can ultimately be realized.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

  • Nvidia: if you invested $1,000 when we doubled down in 2009, you’d have $346,349!*
  • Apple: if you invested $1,000 when we doubled down in 2008, you’d have $43,229!*
  • Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $454,283!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of January 13, 2025

Jon Quast has positions in Five Below. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
placeholder
October hike odds climb toward 60% as Goldman and BofA both flip — what Warsh's "dose of accommodation" really changedRate futures now price roughly 55% to 62% for a 25bp hike at the October 27-28 FOMC, up from about 30% before Chair Warsh's post-meeting framing that the Fed is merely "removing some accommodation." Goldman Sachs has added an October hike to its forecast and Bank of America now sees moves in both October and December. Here is the repricing, the language behind it, and the two data points that decide it.
Author  Irene Q.
Sep 23, Wed
Rate futures now price roughly 55% to 62% for a 25bp hike at the October 27-28 FOMC, up from about 30% before Chair Warsh's post-meeting framing that the Fed is merely "removing some accommodation." Goldman Sachs has added an October hike to its forecast and Bank of America now sees moves in both October and December. Here is the repricing, the language behind it, and the two data points that decide it.
placeholder
Four jobs reports in five days: what JOLTS, ADP, claims and the September payrolls mean for the October Fed decisionThe US labour market faces its densest data week of the month. JOLTS job openings land Tuesday (7.2 million expected), ADP on Wednesday (70,000 expected), initial claims on Thursday and the September non-farm payrolls on Friday (100,000 expected, down from 162,000). Markets price a 64%-70% chance of another quarter-point Fed hike on October 28. The dollar index sits at 100.77 and the S&P 500 at 7,729.8.
Author  Mitrade
Sep 28, Mon
The US labour market faces its densest data week of the month. JOLTS job openings land Tuesday (7.2 million expected), ADP on Wednesday (70,000 expected), initial claims on Thursday and the September non-farm payrolls on Friday (100,000 expected, down from 162,000). Markets price a 64%-70% chance of another quarter-point Fed hike on October 28. The dollar index sits at 100.77 and the S&P 500 at 7,729.8.
placeholder
Nvidia's $150 billion buyback landed — and the AI sector fell anyway. That's the signal worth tradingNvidia closed up 1.68% at $228.86 on 28 September after announcing a $150 billion share repurchase authorisation, the largest single corporate buyback on record, while the rest of the AI complex sold off: AMD -3.6%, Micron -2.6%, Meta -4.8% and the Philadelphia Semiconductor Index -1.61%. The divergence is not noise. Capital is rotating toward cash-flow certainty, not abandoning the AI theme. With Micron reporting after the close on 30 September, here is what the split means.
Author  Irene Q.
Yesterday 06: 31
Nvidia closed up 1.68% at $228.86 on 28 September after announcing a $150 billion share repurchase authorisation, the largest single corporate buyback on record, while the rest of the AI complex sold off: AMD -3.6%, Micron -2.6%, Meta -4.8% and the Philadelphia Semiconductor Index -1.61%. The divergence is not noise. Capital is rotating toward cash-flow certainty, not abandoning the AI theme. With Micron reporting after the close on 30 September, here is what the split means.
placeholder
The 30-year Treasury just hit a 22-year high — and the bond market is not pricing the Fed, it is pricing the deficitThe 30-year Treasury yield closed at 5.56% on 28 September, the highest since June 2004, while the 10-year reached 5.24% and the 20-year 5.60%. The curve has steepened roughly 30bp in eight sessions even as October hike odds sit at 70.3%. That gap is the story: the long end is repricing fiscal and inflation risk, not policy. With PCE on Wednesday and payrolls on Friday, here is what the long end is really saying.
Author  Irene Q.
Yesterday 07: 08
The 30-year Treasury yield closed at 5.56% on 28 September, the highest since June 2004, while the 10-year reached 5.24% and the 20-year 5.60%. The curve has steepened roughly 30bp in eight sessions even as October hike odds sit at 70.3%. That gap is the story: the long end is repricing fiscal and inflation risk, not policy. With PCE on Wednesday and payrolls on Friday, here is what the long end is really saying.
placeholder
【Daily Brief】30-year Treasury tops 5.59%, S&P 500 slips to 7,670 and gold holds $4,180 — PCE lands tonightThe 30-year Treasury yield closed at 5.59%, its highest since June 2002, and the Dow fell 131.59 points to 51,349.92. US consumer confidence dropped to 81.9, a 12-year low, and JOLTS job openings fell to 7.1 million. August PCE and Q3 GDP both land at 8:30am ET tonight.
Author  Suzie
3 hours ago
The 30-year Treasury yield closed at 5.59%, its highest since June 2002, and the Dow fell 131.59 points to 51,349.92. US consumer confidence dropped to 81.9, a 12-year low, and JOLTS job openings fell to 7.1 million. August PCE and Q3 GDP both land at 8:30am ET tonight.
goTop
quote