“This is the coolest store I have ever seen,” said my pre-teen son as we left a discount retailer recently. We were loading up on summertime sports gear, and the store was packed with consumers purchasing all sorts of products.

#-ad_banner-#I was struck by how bright and clean the store was — and particularly by its prices for well-made backyard sporting gear. I was able to purchase an entire suite of gear for what two basketballs would cost at the local chain sporting goods store. 

Sure, the basketballs and backyard gear from the sporting goods chain may have the endorsements of professional athletes and nice packaging, and perhaps be made from slightly better materials — but who cares? Most of this stuff will probably be worn out or lost in a year or two anyway. 

The discount retail store was also stocked with a wide assortment of toys, snacks and portable electronic accessories. Everything was reasonably priced, and the shopping experience was enjoyable. This company looked to me like it could be a great investment, so I took a closer look.

This company is in the same category as other discount retailers such as Dollar General (NYSE: DG), Dollar Tree Stores (Nasdaq: DLTR) and Family Dollar Stores (NYSE: FDO). I’ve visited all three of these chains, but I haven’t been impressed. 

The product mixes and layout of those stores gave me the impression that they were targeting older shoppers. On the other hand, I would consider this company a new model for discount retailers: quality products targeted at young families and presented in a bright and welcoming way. 

	Flickr/fanofretail
	Five Below currently operates more than 300 stores and expects to open 62 new locations.

The company I’m referring to is Five Below (Nasdaq: FIVE), a Philadelphia-based chain of over 300 discount stores. What first struck me about the company’s stock is its huge short ratio of 39.1%. A high short ratio is often a bullish sign, with the potential for a short squeeze to be triggered by positive news. However, FIVE’s lack of insider ownership (just 0.03%) definitely raises some concern.

Five Below delivered incredible numbers for the fourth quarter and fiscal 2013. Fourth-quarter revenue of $212 million was up 22% from a year ago, beating analyst estimates by 2 percentage points. Fueling this increase was store growth of 25% during the quarter, to 304 units. For the year, sales rose 28% from the previous year, to $535.4 million. 

Fiscal 2014 projections are solid with 62 new locations expected to be opened and a 4% increase in same store sales. CEO and founder Thomas Vellios made clear that the company is building a foundation for future growth by investing in people, technology and infrastructure.  

As you can see from the daily price chart below, FIVE was knocked lower between December and mid-February. This selling came on the heels of growth concerns. Price meandered in a 4-point channel until the strong earnings report pushed price sharply higher into the $42 to $44 range. FIVE is above both the 50- and 200-day simple moving average and using the 200-day simple moving average as support.  

Risks to Consider: Make no mistake about it, retail is risky. Consumers have the ultimate choice of a global marketplace, thanks to the Internet. Retailers must compete on convenience, service, product mix and price. In addition, the lack of insider ownership in FIVE may be a red flag. Always use stop-loss orders and diversify when investing.

Action to Take –> I love Five Below for 2014 if shares break $44. My strategy is to buy shares on a break of $44, placing the initial stop-loss order at $41 and a 12-month price target of $54, representing nearly 23% upside.

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