Vitamin seller Blackmores Limited (ASX: BKL) has drawn a lot of attention recently with its meteoric rise, up 372% in the past 12 months to hit a high of $151.79 in trade yesterday.
Blackmores' strong profit growth has to some extent justified the rise, although a limited number of shares on issue and tiny volume (plus more buyers than sellers) has certainly played a part.
Without commenting on the quality of the company or its prospects, I believe that investors who buy Blackmores today face a significant amount of pricing risk. According to data from Nabtrade, on only four days in the past 12 months did the volume of Blackmores shares traded exceed 200,000.
There have been plenty of days in the ~100,000 range, but the vast majority have seen fewer than 100,000 shares traded each day. With only 17.2 million shares on issue, 4.3 million of which are held by directors, buyers are competing for a very limited pool of shares.
This has been great for the share price on the way up, but should things turn south and the company experience some form of mis-step or scandal, it could be a case of watch out below. Limited buyers and sellers mean that there need to be bigger steps made in the price (either up or down) in order to appeal to others in the market.
Investors learned the hard way when they bought Rio Tinto Limited (ASX: RIO) above $100 during 2007 and 2008, and buying Blackmores Limited at any price isn't a shrewd move either.
