Bellamy's Australia Ltd (ASX:BAL) shares have been swamped, falling 43.5% on Friday alone.
Now what?
As always, there are three options:
(1) Sell
For most, the first reaction to Friday's sudden share price fall would have been shock, then panic. Few brokers or analysts in the marketplace saw the fall coming and those that say they did had flimsy investment theses. Indeed, their investment theses appeared to be based more on what 'could happen' than what 'should happen'.
Nonetheless, investing is a game of odds because nothing is certain. And even at today's seemingly discounted price, Bellamy's shares change hands at over 17 times last year's profits per share — and that's before we factor in a potential downgrade to profit margins.
That could prove to be a hefty price to pay for a company that is now also perceived to be lacking in credibility at its highest levels of management.
Here is a rough timeline of events:
- Late August: Bellamy's Chairman Robert Woolley sold $2.9 million worth of Bellamy's shares (priced at $14.60 each), while CEO Laura McBain sold $2.4 million (priced at $14.55). Admittedly, both (but especially McBain) have material amounts of skin in the game. Moreover, sales for the period to 20 November 2016 had risen 24% compared to the same period a year earlier.
Unfortunately, sometimes the perception of a lack of credibility is more powerful than the credibility itself. Therefore, if the perception of poor management hangs around for some time, Bellamy's shares are unlikely to be priced as richly as they once were. - October: In its annual general meeting (AGM) presentation, Bellamy's said Chinese regulations will strengthen the company's long term growth opportunities.
- Early December: Finally, the company said a temporary volume dislocation had taken place in China and full-year revenue could be slightly below last year's result, if the trend persists.
(2) Buy
Let's not forget Bellamy's has been the pride and joy of many investors' portfolios since listing in 2014. Here's why:
As you can see, the share price is up more than 380%. Fuelled by strong growth in the Chinese infant formula market for the past two years. Until last week, nearly everyone thought consumers could not get enough.
If (admittedly, it's a big 'if') the Chinese market supply concerns subside over the coming 12 months as a result of new regulation, Bellamy's shareholders could once again be on a ticket upwards.
Basic economics tells us that if a company has been highly successful in a market which has low barriers to entry, new competitors will emerge and prices will fall. If Bellamy's meets the new regulations, it could provide some protection to the wave of new competition flooding the market. Looking further ahead, if the company can return to exponential sales growth, today's share price will likely prove to be very cheap.
(3) Hold
At its recent AGM, Bellamy's competitor a2 Milk Company Ltd (Australia) (ASX: A2M) announced impressive results for the four months to October, including the key market of China.
If Bellamy's upped sales until November and a2 Milk reported strong results to October, is it likely we have witnessed a structural change in the market? I think it is too early to tell.
Foolish takeaway
Looking at it through different lenses may shed more light on the Bellamy's saga moving forward. Personally, I find the 'lack of credibility' argument a moot point (i.e. debatable) because both directors have significant skin in the game. For example, at the time McBain sold her $2.4 million of shares, her entire stake was worth more than $36 million. Therefore, attacking management's credibility for selling shares may be nothing more than pot-shot journalism.
I do not have enough information to stick my neck out and say Bellamy's shares are a buy or a sell at today's prices, so I would probably stay the course until I could say for certain that my investment thesis was wrong. However, if prices fall further, I will all but certainly be running the ruler over them.
