Shares of organic infant food and baby formula producer Bellamy's Australia Ltd (ASX: BAL) have crashed another 5% today, taking its four-day losing streak to more than 17%. The shares have now lost more than 37% since hitting an all-time high of $16.50 in late December 2015.
Bellamy's was one of the hottest stocks of 2015, but it appears investors may now be taking a breather from the stock. Interestingly, the shares of another top performer, Blackmores Limited (ASX: BKL), have suffered a similar fate to those of Bellamy's since the start of the year and some of the reasons behind their recent falls are shared.
One of the biggest factors dragging on Bellamy's share price at the moment is the negative sentiment caused by the Chinese government's proposal to restrict the importation of food (including baby formula) that is being sold to consumers via websites or social media accounts based offshore.
This so called 'grey market' channel has been a source of huge growth for Bellamy's with supermarket and pharmacy shelves regularly being wiped clean by 'personal shoppers' who sell the formula at hugely inflated prices to consumers in China.
While it is impossible to determine exactly how much of the company's domestic sales are being shipped offshore, it is estimated that between 30%-40% of sales are entering the grey market. If the Chinese government closes this channel to consumers, the exact effect of this on Bellamy's local sales is unknown and it appears investors are just not willing to take on that risk at the moment.
Another factor that has not been well received by investors is the fact that management expects earnings before interest and tax (EBIT) margin to be flat in the second half of FY16 compared to the first half. Investors would have been expecting some margin expansion considering the huge increase in sales, but the company will instead be ramping up its spend on marketing and investing in new growth initiatives.
Issues around whether Bellamy's will be able to source enough raw ingredients to meet the burgeoning demand for its products have also been questioned by some analysts. The company sources the majority of its organic raw ingredients from overseas and although it has recently signed a new supplier agreement with Fonterra Australia, there are still concerns about whether or not the company will be able meet demand before domestic parents look for alternative options.
Increasing competition from the likes of a2 Milk Company Ltd (ASX: A2M) and Blackmores will also be making investors more nervous as competition in the sector begins to really ramp up. This was inevitable considering the staggering growth Bellamy's has achieved and although the market is probably big enough to accommodate more competitors, investors are becoming concerned.
It's easy to forget that Bellamy's shares started 2015 at around $1.70 a piece and investors (or traders) who held on for the ride up would naturally want to lock in some profits. Additionally, short selling of the stock has increased significantly since the start of 2016 (now more than 4% of total shares on issue) and this could also be keeping some investors at bay.
Foolish takeaway
Whether or not Bellamy's share represent good value at the moment is debatable, but investors need to be aware there is likely to be more volatility in the share price while investors grapple with some of the issues facing this fast-growing company.
