Bellamy's back from the brink

Don't ever let anyone tell you they know what's going to happen in the stockmarket. Oh, they might believe it, but they're wrong.

Exhibit A, your honour, is infant formula company Bellamy's. If dog years are seven of ours, and "internet time" is the same (one year at a dotcom was equal to seven years anywhere else, according to former Intel boss Andy Grove), then the past 3.5 years is a lifetime in "Bellamy's years".

And it had something for everyone. When shares first listed on the Australian Securities Exchange in August 2014, they changed hands for $1.35 apiece. Even if you'd bought at the end of that day, ruing the missed 35 per cent gain that was earned by IPO investors who got shares at $1, you were in for a 12-fold gain over the next 16 months; by December 2015, shares were over $16.

Bellamy's Australia has made steady gains in its share price without the drama after its listing. Photo: Kate Geraghty

Bellamy's Australia has made steady gains in its share price without the drama after its listing. Photo: Kate Geraghty

And the success stories were being written. It was a capital light business. A brand owner, with someone else doing the hard work. Exploiting a new market in China, both directly and via Chinese expats as part of the so-called "daigou" trade. Bellamy's was, with some justification, the poster-child for new-age ASX businesses.

The Chinese government, though, had other ideas, tightening import regulations in the first half of 2016. Shares fell to under $10, thanks to the uncertainty, but recovered to more than $13.60. Investor sentiment started to wane, and then ???

??? and then, the whole thing came crashing down. Excited by the astronomical growth in demand, Bellamy's management did deals with its suppliers to make sure it wouldn't run out of powdered milk. After all, being caught with no stock would be the worst thing they could imagine.

But what they couldn't imagine almost meant complete disaster for Bellamy's - too much stock. After signing commitments to buy more inventory, sales growth stopped, almost dead. But the powder kept on coming, and coming.

It became clear to the directors that something was wrong. And there was a real concern that, unless it could renegotiate those supply deals, the amount of inventory would choke the company to death. It simply couldn't sell infant formula fast enough to pay for the incoming stock.

Cue a halt in trade of the company's shares. Then another halt. Then a long suspension. Corporate eulogies were being prepared. The (previously feted) CEO walked the plank.

Somehow - somehow - a deal was done. From a 2016 high of more than $16, Bellamy's shares resumed trading and were under $4 by 2017.

But the story doesn't end there. At the end of January 2018, the price chart for the past 12 months shows none of that drama. Just a steady, almost inexorable rise to back over $15, a "four bagger" for those who held, or bought, just over a year ago, as Bellamy's again rode the Chinese dragon.

Foolish takeaway

No one, in 2014, could have foreseen the trouble ahead. And those who saw only blue-sky returns were right and right - until they were horribly wrong. But equally, those who saw only gloom in late 2016 and early 2017 were also right - until they were also wrong.

But both groups were "right" and "wrong" - in very different directions. And, importantly, the show isn't over yet.

Every so often, the stockmarket provides salutary lessons for those willing and able to learn them. In Bellamy's case, many shareholders suffered from a very significant case of short-termism and overconfidence. And I dare say, a decent whack of schadenfreude, too.

As investors, we have two choices: stay humble, or let the market teach you humility the hard way.

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Scott Phillips is the Motley Fool's general manager. You can follow Scott on Twitter @TMFScottP or email The Motley Fool's purpose is to educate, amuse and enrich investors.

This story Bellamy's back from the brink first appeared on The Sydney Morning Herald.