The Bellamy’s Australia Ltd (ASX: BAL) share price has been one of the most volatile within the S&P/ ASX200 (ASX: XJO) over the past few years and there’s a few reasons for that.
First up is the fact that many investors like this stock because of its leverage to growing demand from China’s rising middle class for its organic infant baby formula. There’s no doubt in theory this is a potentially strong tailwind given China’s population alone is 1.3 billion people!
Bellamy’s also has a generally strong track record of growth if you zoom all the way back to its 2014 initial public offering, although it’s worth noting this track record was bookmarked by the company reportedly coming close to bankruptcy at one point as its cash flows were crippled due to working capital and inventory mismanagement, among other issues related to volatile Chinese sales channels.
All this aside, I expect the main reason the shares are so volatile today is because short sellers are betting increasingly heavily on the share price falling.
According to ASIC data 15.98% of Bellamy’s scrip on issue has been short sold as at July 11, 2019.
This is a high amount for a business that is supposed to be on a growth trajectory and while different investors place different emphasis on short selling activity it’s food for though if nothing else. Especially, when 16% of a company’s outstanding scrip has been shorted.
I expect the short sellers reckon Bellamy’s is set to run into trouble with its China sales, although I’ll admit to having no idea whether they might be right or not.
However, with this much stock shorted I expected the shares at $8.92 today could be very volatile for the rest of 2019. On the one hand they could rocket higher if Bellamy’s comes up with some good China related news, but on the other hand it appears some investors expect problems ahead.
Other stocks investors looking to play the China growth theme could consider include the a2 Milk Company Ltd (ASX: A2M) and Treasury Wine Estates Ltd (ASX: TWE).
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The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates Limited. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended 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 Scott Phillips.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019