by Mike Kapsch, Investment U Research
Tuesday, September 25, 2012
Ever since Facebook (Nasdaq: FB) went public in May, the IPO market hasn’t been getting much love.
In June, CNN Money said, “The IPO market is settling into a deep freeze following Facebook’s troubled initial public offering…”
The Wall Street Journal stated in July, the IPO market just notched “its fourth consecutive period of declining deals in nearly every corner of the world.”
And Forbes reported just last month, “This year is shaping up as one with more cancelled IPOs, a trend that picked up after Facebook went flat on its face.”
Wow, what a sad state of affairs.
I mean, with all this bad news, you’d think investing in an IPO today would be the same thing as throwing your money in the garbage can.
Well, once again the mainstream press is more wrapped up in what’s not working than what is.
Because, despite all the negativity, there are companies proving the IPO market does have fruit to bear.
Last Thursday, Trulia (NYSE: TRLA) debuted on the market, and its shares exploded 41% that same day.
Another company that recently soared following its IPO is Five Below (Nasdaq: FIVE).
Shares popped 53% on its opening day in July. But for the company and its investors, this has only been the beginning.
As I write, it’s up another 5.5% on the day.
And here’s why the momentum isn’t likely to slow down anytime soon…
A Proven Business Model for Uncertain Times
In uncertain times, much like we’re experiencing right now, discount stores have proven to be great investments.
For example, over the past five years, Dollar Tree’s (Nasdaq: DLTR) shares have risen 261%.
Since its IPO in 2009, Dollar General’s (NYSE: DG) stock has climbed 132%.
It makes sense why these companies are doing so well.
When people are tight on cash, they look to save money wherever possible.
Five Below’s business model is based off this same premise.
It sells trendy, inexpensive retail items – like clothes, party supplies, sporting goods, fashion accessories, jewelry, school supplies, games and more – all for $1.00 to $5.00.
Yet, unlike Dollar Tree and Dollar General, Five Below specifically targets teens and pre-teens.
That’s really all there is to it.
So how has the company been performing since its IPO?
Shares of Five Below have been on a tear… up an additional 36% since July 18.
What’s more, it’s making more money than it ever has and is expanding at an incredible pace.
In its second quarter announcement, Five Below said net sales hit $86.8 million in the second quarter, up 40% from last year.
It also opened 27 new stores and ended the quarter with 226 stores in 18 states, an increase of 35% from the end of the second quarter of fiscal 2011.
The fact that Five Below only has a couple hundred stores in 18 states is promising for future growth.
Dollar Tree and Dollar General both have thousands of store locations, each in over 40 states.
And Five Below has big plans for the future, as well.
In fact, over the next 20 years, the company has plans to grow nearly 10 times the size it is today.
It’s a very ambitious goal.
But does it make the company a worthy investment?
The Lowdown on Five Below
As promising as Five Below appears on the surface, not all is perfect.
The biggest thing is, in the second quarter, it announced profits had fallen to $1.2 million from $2.2 million in 2011.
That’s a 45% drop.
It was still enough to beat Wall Street’s expectations though, and shares never really suffered from the loss. But it’s something to keep an eye on in the future.
Looking ahead, Five Below raised its guidance for new store openings for the year from 50 to 52.
And the Associated Press says, the company also forecast third-quarter revenue at stores open at least a year will be up 4% to 6%.
For the moment, it appears Five Below has found a sweet spot for teens and pre-teens.
As long as it continues expanding and making money, I wouldn’t be surprised if it becomes a household name, like Dollar Tree or Dollar General, within the next five to 10 years.
It could be a great ride for investors. But don’t forget those trailing stops along the way.