It might be hard to believe but infant food company Bellamy’s Australia Ltd (ASX: BAL) is now the sixth most shorted stock on the ASX.

The market darling of 2015 now joins the likes of Myer Holdings Ltd (ASX: MYR)Metcash Limited (ASX: MTS) and Worleyparsons Limited (ASX: WOR) in having more than 10% of its issued shares held in short positions.

This would have been unthinkable just a few months ago, and although the shares have already fallen by around 38% from their 52-week highs, short activity in the stock continues to increase.

In fact, short selling has actually ramped up significantly in the last month and this is highlighted in the chart below.

Source: www.shortman.com.au

Source: www.shortman.com.au

Although an increase in short selling is not a reason on its own to avoid a particular stock, it nevertheless is important for investors to understand why people are betting against the stock and what impact this could have on investor sentiment.

I think there are a number of reasons why Bellamy’s has been targeted so heavily in recent months, including:

  • Concerns that changes to Chinese regulations could impact sales to the region.
  • Increasing levels of competition from the likes of a2 Milk Company Ltd (Australia) (ASX: A2M) could make it more difficult to grow its market share.
  • Operating margins have not expanded despite the company reporting much higher sales growth. This indicates the company’s costs are also expanding and it is not benefiting from economies of scale.
  • Concerns surrounding the ability of Bellamy’s to secure the supply of raw ingredients to meet consumer demand.
  • A view that the shares are overvalued and that a change in sentiment is a good opportunity for some investors to be opportunistic.

Whether or not any of these factors become a major issue for Bellamy’s is unclear at this stage, but I think the two biggest issues short sellers are pinning their bets on are changes to Chinese regulations and the valuation of the shares.

Despite the slight shift in sentiment towards Bellamy’s, I personally wouldn’t buy or bet against the shares at the moment, and I think there are at least two positive points investors can focus on.

Firstly, although short activity has accelerated over the last couple of months, the share price has actually stabilised and has continued to trade between $10-$11 per share. This means investors are stepping up to the plate and are willing to support the shares at this level, perhaps in the belief they offer good value.

Secondly, a2 Milk recently upgraded its full year profit forecast thanks to stronger-than-expected sales and noted that it has so far been unaffected by the changes to Chinese regulations. Bellamy’s shareholders should view this as a positive sign that sales to the region may not be impacted as much as first thought.

Foolish takeaway

Bellamy’s remains one of fastest growing companies on the ASX, but this does not mean it is immune from being a target of short sellers.

A number of issues may continue to impact investor sentiment in the short term, but I think many of these issues will be addressed when the company releases its full year results in August.

How 1 Man Turned $10K Into Over $8 Million

Discover how one man turned a modest $10,600 investment into an $8,016,867 fortune. Learn more about this man and how you can start down the path toward financial independence. Simply click here to learn more.

HOT OFF THE PRESSES: Motley Fool’s #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

Simply enter your email now to receive your copy of our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2017.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.

Motley Fool contributor Christopher Georges has no position in any stocks mentioned. The Motley Fool Australia owns shares of Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.