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Five Below Upgraded to Overweight by Morgan Stanley

Five Below is 'outpunching its weight in inventory, freight and financial management,' Morgan Stanley said.

Five Below  (FIVE) - Get Five Below, Inc. Report shares rose sharply Thursday, after Morgan Stanley upgraded the discount retailer to overweight from equal weight, keeping its price target at $230.

The company is “outpunching its weight in inventory, freight and financial management,” Morgan Stanley analyst Simeon Gutman wrote in a commentary cited by CNBC.

While supply chain disruption threatens to curb holiday shopping, Five Below “appears well positioned to manage inflationary costs, inventory availability should be sufficient to meet fourth-quarter demand, and we expect FIVE to gain share behind several catalysts,” he said.

Five Below recently ended up $10.56, or 6%, at $186.31. This still leaves it down about 4% for the last month and about 25% from its August zenith.

That slide notwithstanding, “Bigger picture, FIVE is a high quality, high growth compounder (high teens top/bottom line growth) with a differentiated, defensible value proposition,” Gutman said.

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“We have long been structurally bullish on the business and inclined to get more positive on pullbacks.”

Morningstar analyst Zain Akbari puts fair value at $136 for the stock.

“Five Below's management team has generated consistent returns by leveraging a differentiated concept and prudent expansion strategy,” he wrote last month.

“The firm should be able to expand profitably, as its nimble supply and distribution network are well-suited to meeting the ever-changing demands of its customers (preteens, teenagers, and their money-wielding parents).

“However, we do not believe the firm has developed a sustainable edge. Competition for discretionary dollars spent on younger Americans is rife, coming from not just other retailers but also entertainment providers, including mobile apps.”