Beyond meme stocks: buy this explosive retailer instead

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One of the strongest stock market trends in 2021 has been none other than the rise in actions even. Communities have started forming on social media sites like Reddit to rally to individual actions in the hope of quick payoff. This craze is the reason why companies love AMC Entertainment and GameStop saw their stocks soar to 1,250% and 700% respectively in 2021, although most would agree these are poor fundamentals.

I think investors would do well not to get involved. Instead, a strategy that focuses on holding high quality stocks for the long term is one that I fully support. Five below (NASDAQ: FIVE), for example, is an excellent retailer find remarkable success in the discount space. And based on some outstanding traits, I personally own the stocks in my portfolio.

Here’s why you should seriously consider this explosive retailer.

Image source: Getty Images.

Carve out a niche in the retail space

While the demise of brick and mortar retail is certainly a reality, Five Below has seen brilliant success with a targeted restoration strategy specifically aimed at discount shoppers. From fiscal 2014 to fiscal 2019 (to exclude temporary store closures related to the pandemic in 2020), revenue grew at an annual rate of 22%, while profits grew 29% annually. In addition to these fantastic gains, there are three overwhelmingly positive characteristics that make Five Below a stock to add to your portfolio.

First, the customer value proposition is unmatched. Targeting tweens (ages 10-13), teens, and their parents with items primarily under $ 5, Five Below is known to provide an exciting and dynamic shopping experience. Merchandise that emphasizes trendy and seasonal products encourages repeat visits. The average customer shops at Five Below 10 times a year. As consumers focus more on value in the current inflationary environment, expect a record vacation term for the company.

Second, the key to Five Below’s expansion strategy quickly opens more stores. The business has grown from 192 locations at the end of fiscal 2011 to 1,173 in the last quarter. It’s incredible growth, and it makes perfect financial sense given the profitability of its stores. The average Five Below location generates over $ 2 million in annual sales and costs approximately $ 300,000 to build. The management team is targeting 2,500 national stores in the long term, which would more than double the current footprint.

Finally, what is probably most surprising is that Five Below has financed all of its growth without taking on any long-term debt. It’s rare to find a company with such an impeccable track record like this, let alone in the retail industry. Other leading retailers like Home deposit, O’Reilly Automotive, and Target all carry debts on their respective balance sheets. This makes the capital allocation strategy of Five Below’s management all the more impressive, especially considering how quickly the discount chain store has grown over the past decade.

You better ignore memes stocks

It is certainly tempting to jump on the memes share bandwagon and try to make a quick trading profit based on some news you found on social media. I am not denying the growing influence of retail investors in the stock market, but it is a very dangerous game to play. Trying to synchronize short-term price movements in the market is a losing proposition, which could not only hurt your portfolio, but also negatively affect your peace of mind.

I urge investors to focus entirely on building a diverse portfolio of large companies. Owning Five Below can help you achieve this.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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