An update on Five Below; A new pitch for Adobe; Another reminder to be smart with your cash; Warren Buffett is putting new money to work in Japan; Value Investing Seminar in Italy this July

1) Regular readers will recall that I've written many times about discount retailer Five Below (FIVE)...

It started last July with my "first look" analysis when the stock was trading for around $79. And most recently, I discussed it on January 17. That day, it closed at $90.64.

Since then, due to investors' concerns about tariffs and a recession, FIVE shares have pulled back 16% to close yesterday at $76.11. So let's take a quick look at Five Below's fourth-quarter earnings, which it reported on Wednesday...

Revenues grew 7.8% (adjusted for an extra week in last year's fourth quarter) to $1.39 billion, though same-store sales fell 3.0%. And adjusted earnings per share were roughly flat at $3.48. These numbers all slightly beat expectations.

Five Below gave mixed guidance for the upcoming year, with revenue up approximately 10%, but adjusted earnings per share down from $5.04 to a range of $4.10 to $4.72.

Using the midpoint of that guidance, $4.41, the stock is trading at 17.2 times forward earnings.

That valuation might appear cheap to those who remember that it regularly traded above 30 times earnings during its heady growth day... but it's not cheap enough to interest me in light of the many uncertainties surrounding the company.

2) I'm more interested in software market Adobe (ADBE), which trades at a similar multiple of 2025 earnings...

I discussed the stock on Monday (along with four others), where I said:

So, in conclusion, I think all five of these stocks I covered today are interesting and will likely do well – that's why I continue to follow and write about them – but none are cheap enough to have me "trembling with greed."

That said, if I was forced to buy one today, I would pick Adobe. As a software business, it has the most mouth-watering economic characteristics... and its stock is near a 52-week low – trading at less than 20 times this year's earnings.

Not long after that, I noticed that an anonymous member posting under the handle "Gandalf" from my favorite stock idea website, Value Investors Club, pitched Adobe on Wednesday.

Only members can see the full ideas until 45 days after they're posted, so I'll share some excerpts from the pitch here. As it begins:

ADBE, now at 18.9x 2025 earnings estimates, trades 10% cheaper than the S&P 500 despite far better growth and a superior business model. [Returns on equity] are incredibly high at 47% and this is a business that requires very little [capital expenditures] to grow. Revenue is 90% recurring and gross margins are running now at 89%. Adobe is generating so much free cash flow that their buyback plan is 8% of the market cap of the company. They have a net cash balance sheet.

Large cap [software-as-a-service] names like Microsoft [MSFT] and Salesforce [CRM] trade at 28x and 25x forward earnings, despite similar growth expectations for all three names in 2025. In fact, CRM revenue growth is a tad lower than Adobe. MSFT is a tad higher, but same ballpark. ORCL trades at 24x earnings with sub 8% [earnings per share ("EPS")] growth estimates for [fiscal year] 2025.

Recent quarterly results at Adobe were good. Q1 revenue was up 11% [year over year ("YoY")], with record Digital Media ARR (annualized recurring revenue) up 13% YoY.

EPS growth was strong as usual, up 13% YoY.

The pitch then addresses investors' concerns:

The negative is that 2025 guidance seems to have disappointed investors the past 2 quarters, with ADBE stock down 33% from its recent highs. But overall, 2025 EPS estimates are only off 2 [cents] from last quarter. Revenue growth is 1.7% lower but currency is a factor there.

Overall while growth is slowing (law of large numbers mostly), new subscriptions continue at high levels. Adobe has solid pricing power too as its monthly subscribers pay only $5 to $90 per month (depending on the app).

The big elephant in the room is AI disruption. But so far, we view it as just another competitive product (just as Photoshop has faced numerous competitive offerings for ages now). While growth has not accelerated with AI, it has not disrupted Adobe's business as far as we can see. Their AI advancements appear quite impressive and its user costs similar to Sora.

And it summarizes the bear case:

The risk of course is that growth really falls out of bed and the stock de-rates to say 15x (our downside case is $300 on the stock using $20 in EPS). These are cyclical businesses in general and as Adobe has grown in size, its growth has naturally slowed down.

Finally, as the pitch concludes:

We view ADBE as a far better than average company in the S&P 500 and, based on growth rates today and peers, we think ADBE is worth 22-25x earnings (some premium to the S&P is unquestionably warranted in our view).

That puts fair value in 2 years at $564 to 641 (using 2026 consensus figures). That implies annual [internal rates of return] of 14.2% to 19.7%. We would point out that Adobe has an excellent track record of beating estimates so Street figures may be too low...

I think this Value Investors Club member is right that Adobe is likely to compound at about 14% to 20% annually for the next two years.

As I also noted on Monday, if my team and I here at Stansberry Research decide that Adobe looks compelling enough to add to the model portfolio in our Stansberry's Investment Advisory newsletter, subscribers will be the first to know.

If you aren't already an Investment Advisory subscriber, find out how to become one – as well as gain instant access to the entire portfolio of current open recommendations – right here.

3) I don't want to be a broken record...

But here's another reminder that you need to be smart with your cash and make sure you're getting paid a competitive (4%-plus) interest rate on it – because banks are using artificial intelligence ("AI") to take advantage of folks who aren't paying attention.

Bloomberg has more details in this article from earlier this week: Fifth Third Among Banks Using AI to Help Lure Customer Deposits. Excerpt:

Fifth Third Bancorp, Huntington Bancshares Inc. and Valley National Bancorp are among regional US lenders that use artificial-intelligence tools to scrape customer data, helping them personalize deposit offerings as competition for customers' money intensifies.

Increasingly digital-savvy consumers are hunting for better online alternatives and higher interest rates, and banks, which use deposits as their main source of funding for loans, have had to adapt to win and retain customers who can easily make a switch...

And as the article continues:

Huntington Chief Financial Officer Zachary Wasserman said in a Bloomberg Radio interview that the bank uses AI to understand consumer behavior and figure out when to reach out to them with products that would be beneficial.

A McKinsey & Co. report published last month recommended that banks use machine learning to predict which of its customers are suitable for their interest rates, whether customers might be prone to moving their money elsewhere or if rates are out of sync with competitors.

In other words, banks and brokerages are all too happy to rip you off and pay you little or no interest on your cash... so stay vigilant!

4) I don't think there's much for U.S.-focused investors like me and most of my readers to do here, but I always like to follow what Warren Buffett is doing...

While mostly selling stocks and building an enormous cash hoard, he's putting new money to work in Japan, as this recent Wall Street Journal article notes: Berkshire Hathaway Raises Stakes in Japanese Trading Houses. Excerpt:

Berkshire Hathaway (BRK-B) said it raised its holdings in five major Japanese trading houses, just weeks after Warren Buffett said the company's stakes in them would likely increase somewhat over time.

National Indemnity, a wholly owned unit of Berkshire Hathaway, said in regulatory filings on Monday that it increased its stakes in the five trading houses by between 1.0% and 1.7%. It now holds a stake of between 8.5% and 9.8% in the five companies: Itochu, Sumitomo, Marubeni, Mitsubishi, and Mitsui.

As the article continues, Buffett's involvement isn't new:

Berkshire began buying shares of the five Japanese trading companies in July 2019. Buffett has praised the companies for their use of capital, their management and their attitude toward shareholders.

Buffett told shareholders in his annual letter in February that Berkshire received the Japanese companies' blessing to increase its stake beyond 9.9% and that Berkshire's shareholders would likely see its ownership of all five Japanese companies increase somewhat over time.

Buffett has said an exception to Berkshire's focus on U.S. investments is its growing investment in Japan. At the end of 2024, the market value of Berkshire's Japan holdings had reached $23.5 billion, the legendary investor wrote.

5) Speaking of international things...

My friend Ciccio Azzollini and I will once again be hosting – for the 21st time! – our Value Investing Seminar in Trani, Italy on July 3 and July 4.

We limit the seminar to 60 attendees, who fly into the nearby Bari Airport. Many of them share their latest thinking on where to find the best opportunities around the world and outline their current favorite investment ideas.

This event is fun, educational, and a great addition to any European vacation.

And Trani is lovely – here's a picture of Ciccio and me with the port in the background:

And here's what our friend Guy Spier of Aquamarine Capital kindly posted about the seminar a couple years ago:

You can learn more and register to attend right here... I hope to see you there!

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.