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Why the Bellamy’s Australia Ltd share price is plunging today

Credit: Bellamy's

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.

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Even better, this 'under the radar' consumer play is growing like gangbusters. Shares have rocketed 100% in the last 5 years, DOUBLING shareholders' investment. So what's not to like?

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Motley Fool contributor Tom Richardson owns shares of Blackmores Limited.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. 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.

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