The Motley Fool

Why A2 MILK FPO NZ and Bellamy’s Australia Ltd shares are soaring

Shares of A2 MILK FPO NZ (ASX: A2M) and Bellamy’s Australia Limited (ASX: BAL) are once again on the rise today after giving shareholders something of a reality check late in 2015.

Both companies generated incredible returns for their shareholders over the last 12 months as demand for their infant formula products soared. Sales were strong in China, while Australian supermarkets and pharmacies also struggled to keep their shelves stocked with tins of the so-called “white gold” literally selling out within minutes.

While both shares hit fresh all-time highs on Wednesday last week, investors received a shock when they both plummeted that same afternoon. Bellamy’s shares closed at $13.61 on New Year’s Eve, 17.5% below its Wednesday high, while A2 Milk’s shares closed at $1.705, nearly 28% below their high from the previous day.

Thankfully, both shares have recovered somewhat today, recovering 5.1% and 4.7% respectively. That compares to a 0.6% rise for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

Should you buy for 2016?

As I highlighted in this article late last week, there is a legitimate reason behind A2 Milk’s and Bellamy’s spectacular returns in 2015.

A2 Milk, for instance, increased its EBITDA (earnings before interest, tax, depreciation and amortisation) guidance by a massive 192% in just over a month between November and December, while Bellamy’s posted a 617% increase in net profit after tax (NPAT) for the 2015 financial year. Further impressive results are expected in February.

The collapse in their share prices last week likely had less to do with the performances of the businesses themselves, but instead the sheer run up in their share prices over recent months. Indeed, neither are ‘cheap’ by conventional standards and it’s likely that some investors are becoming unnerved that all of the gains have already been made.

Now, it is fair to assume that all the early gains have already been made. The baby formula shares have received plenty of attention from the financial media while their prospects have been well documented.

That doesn’t mean that they can’t or won’t produce any further gains in 2016 or in the years that follow, but investors should be cautious to make sure that if they do buy, they do so based on the belief that sales and earnings will continue to grow strongly enough to justify the price paid, and that they’re not simply buying on a speculative basis.

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Motley Fool contributor Ryan Newman owns shares of Bellamy's Australia. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

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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