Shares in Tasmania-based baby formula business Bellamy's Australia Ltd (ASX: BAL) plunged 5.6% today and are down 11% over the last week to $5.34 despite the group releasing no news to the market.
The most likely reason behind the price falls is a broker recently downgrading the stock's rating largely on the basis of valuation. Surprisingly, the struggling baby formula company was trading above $6 in early May after rising nearly 50% in the space of a month despite the company issuing no trading update.
Given the group's recent widely publicised problems including an operating cash out flow of $23.7 million for the six-month period ending December 31 2016 it still looks like the stock is overvalued to me.
The company also has little cash on its balance sheet and debt is rising which means it needs to dramatically improve its operating performance over the current half to get anywhere near justifying its recent share price rises.
Recently a US-based hedge fund named as Delta Partners has been aggressively buying into the business with a near 10% interest revealed at the end of April and this is most likely what is sparking renewed investor confidence in the business.
Amongst the China-facing consumer retail stocks I still prefer the proven track record of vitamin manufacturer Blackmores Limited (ASX: BKL), as a long-term option for growth-oriented investors.
