Here’s why the Bellamy’s Australia Ltd share price has soared today

Credit: Bellamy's

The share price of market darling Bellamy’s Australia Ltd (ASX: BAL) is back on the winner’s list today, climbing 6.1% to $13.48. That compares to a 0.5% lift for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) and a 1.9% rise for rival A2 MILK FPO NZ (ASX: A2M).

While there’s barely a share out there which hasn’t experienced some sort of volatility so far this year, ASX-listed baby formula companies such as Bellamy’s and A2 Milk have been hit particularly hard following what was an incredible run in 2015 for the pair.

Bellamy’s, for instance, traded as high as $16.50 on 30 January and has since fallen 18% (even with today’s jump), while A2 Milk’s shares have fallen 31.4% since their high on the same day. It’s possible that some investors are simply taking advantage of that sell-off to buy today, after shares closed at just $12.70 on Monday.

Should investors be worried?

In economics, the “loss aversion” theory indicates that losses are potentially twice as powerful to investors as gains. Thus, even though the pair rose to staggering heights in 2015, making investors a lot of money in the process, investors will still be feeling the losses suffered so far in 2016.

Although there are perfectly logical reasons as to why the share prices of both companies soared in 2015 – including rapid sales growth and demand which heavily outpaced supply – it seems likely that there was also some hype built into the share prices. The pair gained plenty of media attention and there is little doubt some investors bought in simply to catch the momentum train.

The fact is, neither company is trading “under the radar” anymore, and investors are likely reassessing whether it’s worth holding on for another run in 2016, or if they should take their profits and run.

It should be noted that it is unlikely that either company will enjoy the kind of gains it did last year, again this year, but if sales do continue to rise and translate into sound earnings growth, the shares could still be worth more in a few years’ time than they are today. I’m still holding some of my shares of Bellamy’s for this reason, although I did sell some as a result of it becoming too large a position within my own portfolio recently.

If you’re in the market for short-term gains, buying either company now could be very risky for your wealth. But for the long term, investors may want to look at taking advantage of any further pullbacks in the share price, so long as they’re comfortable with the risks vs. reward trade off at that price.

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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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