Five Below Inc (FIVE): Why $2.1 Billion Is Just a Start

If fundamental strength causes analysts to increase their earnings estimate by 50%, and at the same time, investors are willing to pay a 25 multiple, we suddenly have a geometric increase in the stock price. (In this example, the stock would rally 116% to $37.50.

And this isn’t really an extreme example. There are plenty of instances where growth stocks have commanded multiples of 40, 60 or even 100 times forward earnings, while analysts continue to revise their estimates higher.

The Outlook for Five Below

Five Below Inc (NASDAQ:FIVE) appears to be in the early stages of this virtuous cycle. As the company continues to execute on its growth plan, I expect analysts to increase their forward estimates – and at the same time, investors will gain more confidence and be willing to pay a higher premium.

Even though the stock holds a market cap of $2.1 billion, the attractiveness of the overall concept, and the blue sky in terms of available markets for the company to move into, leaves plenty of room for a significantly higher market cap.

It’s very difficult to place a price target on a retail stock with so much room for growth. The company has a relatively narrow footprint in the US – with several years worth of expansion possible before even thinking about international expansion.

Five Below Inc (NASDAQ:FIVE) is operating in a particularly attractive sub-category of the retail market. Last month’s retail sales data revealed surprising strength, with the apparel and general merchandise areas standing out as strong winners.

The stock is a recent IPO (within the past year) and is still building its institutional following, which should represent a strong source of demand for shares of the stock. Over the next year, it wouldn’t surprise me at all to see the stock make large gains in price as the growth concept gains traction.

Zachary Scheidt has no position in any stocks mentioned. The Motley Fool recommends Apple, Chipotle Mexican Grill, and Salesforce.com. The Motley Fool owns shares of Apple and Chipotle Mexican Grill.

The article Five Below : Why $2.1 Billion Is Just a Start originally appeared on Fool.com.

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