dimanche 4 mars 2018

The ideal stock

Over the last few years, I've written about a lot of stocks I liked. But I don't think I've ever written about the ideal stock.
Here it is: Five Below (FIVE).

Your ideal stock has to be in a safe sector. Bargain retail to me is an excellent business (let's think about Dollarama, Dollar Tree and Dollar General). Amazon has not been a threat in that sector so far and I don't think it will in the short or medium term.

Five Below has almost zero debt. Hard to do better than that.

Return on equity: That's how much juice you could squeeze from the fruit. The current ROE is 26. The historical ROE over the last 5 years has been 23. That's very good.

Growth: The growth of Five Below has been spectacular so far. Here's the EPS.:

2013: (1,28$)
2014: 0,59$
2015: 0,88$
2016: 1,05$
2017: 1,30$
2018: 1,80$ (estimates)
2019: 2,38$ (estimates)

Beta: 0,8, which indicates a sector which is not cyclical. Which is great.

Market Cap: 3,8 billion dollars. Plenty of room to grow for many years because the market isn't saturated.

Everything looks great with that stock. Except the price of course. But that's how it's always been: you have to pay a lot for a very nice story that should remains nice for many years.

At the current price, you're paying about 29 times next year's earnings. It's a lot. But it's a very predictable sector, a very lucrative industry and don't forget the stock has no debt. You probably have many stocks with medium or even high debt on your portfolio. Sometimes, you pay 20 or 25 times earnings for a stock with a lot of debt without counting that debt in your evaluation. In fact, if you add the debt to the value of your stock, you'll see many PE ratios going up, way more than the PE of Five Below.

And, finally, that business grows organically. They don't rely on acquisitions to grow (not for now, at last). That's the best situation for a business. Because organic growth is less risky than growth related to acquisitions. 

So, in my view, this is the perfect stock. Or almost.

That's the kind of stock that you're waiting for a pullback before buying. But you shouldn't wait for a specific price target like those peewees on Seeking Alpha. You should be looking for a specific PE, like something under 25 times next year's earnings. You surely will never get that stock for less than 20 times next year's earnings, so don't set too optimistic target.

6 commentaires:

  1. This stock is like that shy and full of potential girl in High School, she is not quite a bomb but you know that if you don't make your move now, she will be unreachable in a few years...Five Below is a typical Peter Lynch stock. Peter had the chance of having a lot of horses doing the race and was wise enough to keep the pure sang running for many laps (or bags). I agree with the SA Value crossdressing in growth inverstor, they have been forever claiming that Constellation and Dollarama have been overvalued. Good timely post Penetrator, love them.

  2. I quite agree, it is the perfect stock, except for the price. I've been willing to buy that stock for quite some time now but I will be patient. Peut-être une erreur d'attendre... dur à dire, il est vraiment cher, mais quels fondamentaux!

  3. I bought FIVE and then I sold it. At first, it was not acting right for a stock that has so much growth in same store sales right now... and earnings growth from aggressive expansion just around the corner. I thought maybe the stock might go down because the busiest part of the shopping year is behind us and I was buying at the worst time (after x-mas shopping season). I was able to tough that out...but when the market got really volatile lately, I concluded that if there is a correction...a solid correction and not just a hiccup, then a stock with FIVE's p/e ratio will be hammered despite its excellent future prospects. So, put me in the camp of those guys who might miss out but do not want to pay ~ 30x next year earnings AT THIS TIME. Usually, I'm willing to pay up for the best names. The current market volatility has me scared into stocks with a lower next year p/e than FIVE.

    1. Which stocks were you scared into?

    2. SUPN is now at ~ 15x next year p/e despite huge growth ahead. Recent case made in this seeking alpha article:


      FIZZ is at 25x next year earnings and the next earnings report (due Thurs. March 8) may be a catalyst to spike the stock's price higher.

  4. I think Agriculture stocks will outperform the general markets over the next several years. Look at Nutrien NTR and Intrepid Potash IPI. Also JNJ is a no-brainer right here with double-digit upside. All in my amateur opinion. I own all three.