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Top broker says buy A2 Milk Company Ltd (ASX:A2M) shares

The A2 Milk Company Ltd (ASX: A2M) share price has bounced back from yesterday’s selloff and is pushing notably higher on Thursday.

At the time of writing the infant formula and dairy company’s shares are up almost 4% to $10.95.

Why are its shares bouncing back today?

The market appears to have responded well to the reasonably positive reaction by brokers to yesterday’s sales update.

Although Citi has downgraded the company’s shares down to a neutral rating and $11.00 price target, others haven’t been so bearish.

According to a note out of Goldman Sachs, its analysts have retained their buy rating but cut the price target on its shares ever so slightly to $12.70.

Goldman believes that the weaker than expected sales update is transitory in nature. The broker suspects that it could be the result of the company reducing supply of product over the fourth quarter in order to allow for a smoother transition to its newer packaged product in both China and Australia.

Backing up this theory is demand on China’s Tmall. The broker’s Tmall tracker suggests that consumer demand remains strong, with sales of its infant formula between January and April growing 125% on the prior corresponding period.

As a result, Goldman remains confident that this is a temporary slowdown and that underlying demand fundamentals remain unchanged.

Should you invest?

I think that Goldman Sachs makes some valid points in its note and would agree that it is a buy.

Though, considering the premium that its shares do still trade at, investors may want to limit an investment to just a small part of their portfolio.

In addition to a2 Milk Company, I think the same applies to rival Bellamy’s Australia Ltd (ASX: BAL) which was also sold off yesterday. A small position with a long-term view in Bellamy’s could one day prove to be a very rewarding investment.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. 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.

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