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Is there still time to buy shares in Bellamy’s Australia Ltd?

Credit: Bellamy's

What happened? The share price of market darling Bellamy’s Australia Ltd (ASX: BAL) continued to soar in November, hitting a brand new high of $11 late in the month to take the year-to-date gain to an amazing 554%, however it has to be asked if this could all end in tears for shareholder late to the party?

Why is Bellamy’s Australia creating millionaires? After increasing over 5-fold this year and nearly 7-fold since listing, it’s certainly feasible that Bellamy’s Australia has created a number of millionaires this year.

Bellamy’s, the manufacturer of 100% certified organic food and formulas for babies, has seen demand for its products skyrocket as Australian parents increasingly search for the healthiest options for their children, while Chinese consumers are willing to do anything to get their hands on quality formula.

Could this end in tears? Investors buying shares now in the hope of a quick buck need to tread carefully. While the 2015 financial year was an incredible success, with sales increasing by 153% and net profit after tax, or NPAT, surging 617%, the 2016 result could well be constrained by Bellamy’s inability to keep up with demand.

Although just today the company announced a deal with Fonterra to “add significant additional capacity” to its production line with manufacturing due to commence in mid-2016. The deal was described as “multi-million dollar” in nature, although no precise figure was given to its estimated value.

As my colleague wrote early in the month “while Bellamy’s makes the majority of its sales in Australia, the company estimates that between 30% and 40% of those products are then resold for a profit in China, sparking frustration among local consumers who can’t seem to get their hands on the company’s tins.”

Bellamy’s currently trades on 118 times trailing earnings and 49 times forward earnings, which isn’t crazy, however it certainly isn’t cheap. Bellamy’s exposure to China’s enthusiasm for Australia’s dairy (and quality produce in general) makes it a must-have holding for the right price, but the direction of the share price in the immediate future is very difficult to gauge.

As we’ve seen with 1-Page Ltd (ASX: 1PG), Reffind Ltd (ASX: RFN) and Freelancer Ltd (ASX: FLN), newly listed ‘hot-stocks’ can run hard then come back to earth very quickly. These types of stocks are a long way from being the reliable, income-generating stocks older Australians are looking for, but are certainly appealing to younger investors with time to let management prove themselves.

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Motley Fool contributor Andrew Mudie has no position in any stocks mentioned. You can find Andrew on Twitter @andrewmudie

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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.

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