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Should shareholders of Bellamy’s Australia Ltd or A2 MILK FPO NZ be worried?

It’s been a horror start to the year for most investors – not only in Australia, but around the globe. While the pain has been widespread; one of the sectors that have been hit the hardest locally is the very same one that exploded with investor optimism in 2015.

Bellamy’s Australia Ltd (ASX: BAL) and A2 MILK FPO NZ (ASX: A2M) produced some of the most outstanding returns over the last 12 months as demand for their baby formula products skyrocketed. Blackmores Limited (ASX: BKL) was also a top performer, its share price rising more than 520% to end the year at almost $218 per share.

Unfortunately, all three have been in the firing line of investors so far this year, possibly by those looking to redeploy their cash to ‘the next big thing’. Bellamy’s, for instance, which hit a high of $16.50 a little over a week ago, has retreated a total of 25.4%. Its shares are down 5.9% today alone at $12.31.

A2 Milk shares have been hit even harder, losing 35.3% at the same time as Bellamy’s decline, while Blackmores has fallen a more modest 5.7% since Monday.

Should you be worried?

Investing in the market’s hottest shares can be a dangerous move – just ask those investors who eagerly bought into Liquefied Natural Gas Ltd (ASX: LNG) after its incredible rally between 2014 and 2015. Sometimes, the shares can become so amped up that investors lose all rationality and purchase the shares out of speculation – that is, assuming the price will simply continue to rise so they can book in a quick profit.

It’s worth noting that I believe there was a perfectly sound reason why the three foodstuffs companies mentioned above rose in price last year. They each recorded enormous growth and the future is looking very bright for them – particularly with such strong growth prospects in the enormous Chinese market.

In saying that however, all three have become quite ‘hot’. Not necessarily to the point where they are so outrageously priced that anyone still holding the shares should sell immediately (as I said, their futures are still promising!).

I myself was (and still am) a happy shareholder of Bellamy’s. But for the reasons outlined above, I did elect to sell some of my shares recently, for a price slightly above today’s level.

That doesn’t mean I think they don’t have a promising future – not by a long shot! Demand is still skyrocketing and Bellamy’s recently increased its prices which should result in greater margins in the future. But as the price rose (and rose, and rose), I began to grow uncomfortable with the risks of holding too many Bellamy’s shares in my own portfolio.

Now, Bellamy’s shares are currently sitting well below their recent high levels, as are shares of A2 Milk. Both companies could be decent pickups again, particularly if they do fall any further in price, although investors need to be careful not to speculate, and to conduct their own due diligence before even considering a purchase.

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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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