On March 29, the yield curve in the United States momentarily inverted, with two-year bonds offering a greater interest rate than ten-year bonds. This is an indication that investors are more concerned about the economy in the near term than over time, thus they seek a higher yield to compensate for their increased caution. Furthermore, it is a warning sign that an economic downturn will occur within the next 12 months.

Investing in firms that succeed in a recessionary market is a good idea to protect your portfolio. Five Below, which has grown 45.2% year over year, is one such firm that should be on your radar right now.

Stretching budgets 

Five Below is a low-price, high-volume discount chain. It primarily sells items for less than $5 and has 1,190 stores across the United States. Customers can shop at any of the company’s 1,190 locations across the country for a wide range of products, including tech gadgets and beauty goods as well as apparel and pet supplies.

The CEO, Joel Anderson, offered this answer to consumers’ questions on the fourth-quarter 2021 earnings call about how the firm would do in a potential negative scenario, especially given the recent geopolitical instability and rising US interest rate environment.

“Take ’08 as an example,” he added. “Each time there’s been a consumer problem, Five Below has won. I don’t see why that would not be the case this time either.”

“When everything is going right and money is flowing like water, families are hesitant to cut back on their children’s expenses around significant events like birthdays and holidays,” he says. This clearly works in favor of Five Below since it targets a younger audience.

The firm’s advantages also include its in-house brand, Five Below, which has a customer-centric culture and offers a vibrant shopping experience with a wide range of sought-after and modern items. In this case, regardless of the economy’s condition, Five Below becomes a top destination.

All-weather appeal 

To be clear, Five Below isn’t a company to buy just as a defensive play because it lacks development potential. In fact, the reverse is true. From fiscal 2011 through 2021, the firm has grown annual revenue and operating income tenfold and fifteenfold, respectively. That’s truly remarkable growth during a time when the economy was expanding (besides the coronavirus-induced downturn).

The stock is up 30% this year, and investors are anticipating further gains. The firm has experienced some success with the introduction of a “triple-double” strategy that should excite investors. By 2030, the chain plans to have 3,500 stores, roughly tripling today’s number. Five Below’s revenue and earnings per share are expected to double by 2025 under these conditions.

Five Below is a great example of the impact of big stores on profits. A larger store footprint equals greater sales, bigger margins, and more money. And for investors, that means a stock poised to continue outperforming the market in years to come. During the previous five years, Five Below’s shares have risen by 261%, compared with 110% for the S&P 500. And even though it has dropped by 23% thus far this year.

During recessions and robust economic periods, the company thrives. And with all of the macroeconomic uncertainty we’ve seen recently, it’s an excellent all-weather stock for your portfolio.

Author: Scott Dowdy

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