Stock Takes: A2 Milk on a rollercoaster ride

Short selling is a likely factor in making a2 Milk a volatile stock. Photo / File

A2 Milk has been a volatile stock and the curious business of short selling appears to be at least partly to blame.

Sharp movements, up or down, seem to be par for the course for a2 Milk, which this month produced a 116 per cent lift in net profit to $195.7 million for the June year. The stock traded yesterday at $12.90, more than its double its year-ago price.

In terms of price action, a number of factors come into play for a2 Milk, not the least of which is the "polarising" nature of the beast, according to long-time a2 Milk watcher, Harbour Asset Management senior analyst Oyvinn Rimer.

There are sceptics about the a2 beta free milk proposition and then there are the believers, who see it as the start of something ever bigger.

"I suspect that it's going to be a volatile stock for a long time and short selling is probably going to be part of that," Rimer says.

"But there is also news flow, regulatory noises, dealing in China, and these two very opposing sections of investors as well, which will make it quite interesting."

Short selling involves the sale of shares that the seller has borrowed. It is motivated by the belief that a security's price will decline, enabling the stock to be bought back at a lower price.

But if the negative event does not happen, then the short seller is left scrambling for stock, driving prices sharply higher very quickly.

"Short selling can be a meaningful contributor to volatility but I think that for a2 milk there are other things at play," he said.

"It is a highly polarising stock. Because the stock is so big, every incremental piece of news flow can swing into the hand of one or two of these camps, and I think that you what you see in the market is a fair reflection of that."

Then there is the "noise" that comes out of the Sydney distribution network, where much of the grey market or "daigou" trade into China originates.

Much is often made of the level of inventory that a2 Milk carries — too much or too little.

"Sadly, it's very much an immature stock in a trading sense because the market has not worked out yet what the key pieces of information are that will drive long-term value," Rimer said.

"In the interim we are just using a lot of short-lived news flow that probably does not tell you anything about long-term value."

A2 and the FTSE

In the "news flow" this week was a2 Milk's inclusion on the FTSE Global Equity Index Series — Asia Pacific ex Japan — for mid cap companies.

The stock may have received a boost from a strong result from one of its Aussie peers, Bellamys, which also has trading links with China.

Former chief executive Geoff Babidge advised the NZX that he had sold down his stake by 750,000 shares, worth just under $10m all up.

What bubble?

Apple became America's first trillion dollar stock recently and other big tech companies like Amazon, Alphabet and Microsoft are hot on Apple's heels.

The rise and rise of Apple, and its big ticket peers, have some asking if the tech sector is an over priced.

Some have drawn parallels with the year 2000, when the tech bubble burst, later dubbed "tech wreck".

"This doesn't look like a bubble market to me. The top five US companies were valued almost three times higher back then," Milford Asset Management investment analyst Stephanie Perrin said.

"These tech companies are also fundamentally different from how tech companies were in 2000," Perrin says.

"They generate significant amounts of cash, they have stronger balance sheets and are inextricably linked to our day-to-day lives."