2 Factors Leading To UBS's Downgrade Of Five Below

Five Below Inc (NASDAQ: FIVE) is a standout in the retail sector at a time when many companies are lowering their footprint by closing stores Five Below is looking to open new ones.

Five Below's status as a retail standout helped boost shares higher by nearly 15 percent since the start of 2017 but not all among the Street remain bullish. UBS's Michael Lasser downgrades Five Below's stock rating from Buy to Neutral with a price target slashed from $59 to $52 for two reasons: fidget spinners and the stock's valuation.

First, Five Below's recent momentum is in part due to the immense popularity of fidget spinners. But now the company is forced to "quickly recognize and react" to the fact that the toy's popularity is fading and will be forced to manage down its inventory, Lasser noted (see his track record here).

In fact, the company has already become promotional and is offering two fidget spinners for $5 or one for $3.

Second, Five Below's stock valuation has "hung in there better than most retailers" and is now trading at 27x on a next-twelve-month basis, the analyst continued. This represents a 65 percent premium versus the hardline and broader group average and marks an expansion from the 50 percent premium the stock traded at to start 2017.

Finally, Five Below is still at the end of the day a retailer and at the very least the negative perception of poor overall trends could act as an "overhang" for the stock.

At time of publication, shares of Five Below were down 3.14 percent at $46.36.

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