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A2 MILK FPO NZ’s share price jumps 7%: Is it time to buy?

Shares of A2 MILK FPO NZ (ASX: A2M) have resumed their rally today, climbing another 3% to $1.725. They’ve risen a little over 7% since Thursday last week, although they remain 27% below their all-time high of $2.36 achieved late in 2015.

So What: Australia’s baby formula market experienced something of a boom in 2015, driven by soaring demand for a product that was in limited supply.

Indeed, there were countless media reports highlighting the desperate measures of Australian parents to get their hands on what they referred to as “white gold” baby formula, while there were just as many reports highlighting how many of the tins being purchased in Australia were subsequently being sold online to Chinese residents.

In China, there have been many health scares in recent years involving the quality of food products, particularly with those products meant for infants. As such, many parents are willing to pay multiple times as much for high-quality or organic baby formula that they know they can get from Australia or New Zealand.

As such, A2 Milk was one of last year’s darling shares, appreciating at a rapid pace as investors recognised the potential for its baby formula product. In fact, the company was even forced to upgrade its EBITDA (earnings before interest, tax, depreciation and amortisation) guidance by a total of 192% between November and December last year.

Those kind of increases don’t go unnoticed, and a rise in the company’s share price was to be expected. However, it seems investors pushed the share price too high too fast and a pullback was thus in store. Bellamy’s Australia Ltd (ASX: BAL) was the same – it hit a high of $16.50 per share but has subsequently retreated 15% to $14.01. The shares did fall as low as $12.23 at one point early last week.

Now What: Although the shares of both companies have retreated in recent weeks, neither are looking particularly ‘cheap’ right now. That’s not to say that you should avoid either company altogether (I still own some shares of Bellamy’s, although I did sell a portion) – both could rise even further over the coming years if demand continues to grow – but investors do need to be cautious of the price they’re paying.

Remember, if you’re not comfortable owning a share, or if you’re uncomfortable with the price you’re paying, the best option may be to just avoid it altogether. With the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) hovering well below last year’s high levels, there are plenty of other great opportunities for investors to choose from instead.

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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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