You Can Buy Five Below At Discount Prices, But Wait Shares of Five Below (NASDAQ: FIVE) entered a correction two weeks ago when Morgan Stanley downgraded the stock to Equal Weight from Over Weight.

Fairly Valued Five Below Gets Cheaper

Shares of Five Below (NASDAQ: FIVE) entered a correction two weeks ago when Morgan Stanley downgraded the stock to Equal Weight from Over Weight. The reasoning was simple and shouldn't have sparked the correction it did. According to Morgan Stanley, the stock was fairly valued at $230 with a balanced risk-reward ratio. In that light, a minor pullback may have been expected but not the 17% correction that is now underway. That's because the company's Q2 results backed up Morgan Stanley's decision to cut exposure and gave an additional reason for selling. The guidance, while good, is also aggressive and leaves the door open for a disappointing report next reporting cycle.

Five Below Has Mixed Quarter, Guides Higher

Five Below had a good quarter. The company's store traffic improved along with the reopening and was aided by a strong back-to-school season as well. The company reported $646.55 million in consolidated revenue for a gain of 52.7% over last year and 55% over Q2 2019. The strength was driven by the addition of 34 new stores or +14.2% compounded by double-digit comp sales. The bad news is that revenue missed the consensus by nearly 200 basis points which is a big no-no when other top retailers are easily clearing their hurdles.

Moving down the report, the company's profitability improved over the last year as well. The operating income increased nearly 140% on the back of revenue strength and cost-leverage to drive above-consensus results on the bottom line. The GAAP EPS of $0.15 beat the consensus by $0.02 despite the revenue shortfall but the company is expecting margin pressure to begin building. The outlook for the next quarter assumes a seasonal downtick in revenue that will be accompanied by a mild contraction in margins.

The guidance also assumes a high number of new store openings. The company is projecting 40 to 45 new stores compared to the 34 opened in Q2 and we think that is where the risk lay. The guidance is only marginally higher than the consensus estimates and depends heavily on stores that aren't yet open.

The Analysts Cut Five Below's Price Target

Five Below is evidence of a trend we've seen develop at the tail end of the Q2 reporting season that could cap index gains in the near term. The company delivered a good report but one below the market's expectations and that is leading the analysts to cut their price targets. Marketbeat.com's analyst tracking tools show four sell-side analysts, of eighteen covering the stock, lowered their price target in the wake of the Q2 report. The consensus target is still well above the price action but the tide may have turned for this market. If the analysts continue to cut price targets or worse, begin to cut the ratings, shares of Five Below could go much, much lower.

The Technical Outlook: Five Below Might Reverse

Price action in Five Below has corrected and may be on the verge of a full reversal. The price action is finding support near the 150-day moving average but it may not hold up. If price action falls below the $190 level and confirms resistance we see this stock falling down to the $160 or $140 level.