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.

If you're hesitant to buy shares of A2 Milk or Bellamy's at their current prices, our top analysts have found another share which could also be an excellent addition to your portfolio in 2016.

The technology that’s going to REPLACE the Internet is already here…

Dollar for dollar, insiders are calling it one of the biggest new markets in the history of modern business… NOW is the time to get in on the hush-hush industry that could be poised for growth of over 4,463%+ by 2020… And the 1 ASX stock that stands to grow YOUR money right alongside it! Simply click here to learn its name.

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.

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.