On the morning of November 6, former President Donald Trump celebrated the results of the US presidential election, sending him back to the White House in January. And that’s exactly why Bank of America demoted Five below(NASDAQ: FIVE) stock this morning.
As of 10:15 a.m. ET, shares of discount retailer Five Below were down about 9% and had fallen as much as 12% earlier in the morning. Investors are responding to commentary about how Trump’s proposed economic policies could negatively impact this sector.
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Five Below sells products aimed at teens and pre-teens, ideally priced under $5. It needs cheap merchandise to ensure good profit margins. But according to CNBC, Trump has proposed a tariff of up to 60% on goods from China. And this would have a dramatic impact on Five Below’s (and others’) financial results if implemented.
This is something Five Below discussed in its most recent annual report. Management wrote: “Increased tariffs and any newly imposed tariffs on items imported from China or elsewhere would likely result in lower gross margins on affected products.” In other words, the costs for these products would increase. Five Below would either have to raise prices, which is difficult as a discount retailer, or accept lower gross profit margins.
This potentially negative impact is why Five Below stock is down today. But it’s also why company shares include Honestly(NYSE:W) And Yeti Holdings(NYSE: YETI) are also down. Some on Wall Street today downgraded this duo along with Five Below. As of 10:15 a.m. ET, Wayfair shares were down about 11% and Yeti shares were down about 8%.
I am not suggesting that the economic policies of the President of the United States are unimportant; it matters a lot. That said, investors seem to be assuming that Trump’s coming term will necessarily be bad for the business of Five Below, Wayfair, Yeti and other companies that source products from China. But this is not a done deal.
For reference, take a look at the long-term chart showing gross margin and operating margin for these three companies. Try to discern from the graph when Trump set his economic policies during his previous administration. And try to find a pattern of change once President Joe Biden took office.
FIVE gross profit margin chart
In reality, elections come and go and the consequences for the stock market are usually not as profound as feared. And this is because companies are not static. Every company can adapt to changes in the work environment in unexpected ways.
I’m not saying that all is well with Five Below, Wayfair, and Yeti and that their stock prices will keep going higher. But I say that panic on November 6 is premature. While there are some clouds on the horizon directly related to Trump’s economic proposals, investors should balance their perspectives with the potential benefits of his plans and the fact that what will actually happen is unpredictable.
There are many unknowns to this story. It is possible that there will never be higher tariffs on Chinese goods. It would not be the first time that a political proposal failed to bear fruit. And even if Trump were to raise tariffs, Five Below, Wayfair and Yeti could raise prices to compensate. After all, the higher rates would also have consequences for competitors. Finally, companies could move their supply chains to more favorable countries. In fact, that happened a lot during Trump’s first presidency.
It’s fair to say that the management teams at Five Below, Wayfair, Yeti, and more will need to make changes to adapt to current economic policies. But that is always the case. And for now, it’s premature to say whether these companies will successfully weather the changes or not.
I would be patient when it comes to Five Below stock and others in the same boat. There are good reasons to sell shares. But selling because of an election – within 24 hours of an election, at that – is a move driven more by emotions than by business fundamentals.
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Bank of America is an advertising partner of Motley Fool Money. Jon Quast has positions in Five Below. The Motley Fool holds positions in and recommends Bank of America. The Motley Fool recommends Five Below and Wayfair. The Motley Fool has a disclosure policy.
Donald Trump wins the presidential election. Here’s why these three stocks are plummeting today. was originally published by The Motley Fool
