Growth Stock Down 57%: A Buying Opportunity?

As investors, we're always on the lookout for undervalued stocks that have the potential for significant growth. But what happens when a growth stock that was once soaring suddenly takes a nosedive? Is it time to sell, or could this be a buying opportunity? Let's take a closer look at a growth stock that has recently declined by 57% and explore whether it's worth considering for your portfolio.



The growth stock in question is Five Below (FIVE), a discount retailer that targets teens and tweens with a price point typically under $5. Despite its aggressive expansion and impressive revenue growth, the stock has taken a gut-wrenching 57% tumble from its peak in August 2021. So, what's behind this decline, and is it time to buy the dip?

1. Slowdown in Same-Store Sales: Five Below's same-store sales were up just 0.6% in Q3 2024, and for the last nine months, they were actually down 2.6% compared to the same period last fiscal year. This indicates a struggle to boost foot traffic at its locations, which is a concerning sign for the company's growth prospects.
2. Increased Selling, General, and Administrative Expenses: The company's operating loss in Q3 2024 was $606,000, compared to a $16.1 million operating profit in the year-ago period. This is due to significantly higher selling, general, and administrative expenses, which have negatively impacted the company's profitability.
3. Competitive Retail Sector: The discount retail sector is highly competitive, with companies like Walmart and Amazon targeting value-conscious shoppers. This makes it difficult for Five Below to maintain lasting success against competitors with virtually unlimited financial resources.

These factors suggest that Five Below is facing significant challenges in maintaining its growth trajectory. However, it's important to note that the company's aggressive expansion plan is still in place, with a goal to double its store footprint in the next five years. This could potentially lead to a recovery in growth if the company can successfully execute its expansion strategy and improve its operational efficiency.

Additionally, the stock's valuation is currently at a discounted level compared to the S&P 500, with a P/E ratio of 21. This could make it an attractive investment opportunity for value-oriented investors who believe in the company's long-term growth potential. However, the company's lack of durable competitive advantages and the need to consistently register healthy same-store sales growth and improve profitability are red flags that investors should consider before making a decision.

In conclusion, while Five Below's recent decline is concerning, it may present an opportunity for long-term investors who believe in the company's growth prospects. However, it's crucial to carefully evaluate the company's financial performance, competitive advantages, and market position before making a decision. As always, it's essential to do your own research and consider your risk tolerance before investing in any stock.