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Is the share price of A2 Milk Company Ltd (ASX: A2M) in a “dead cat bounce”?

Yesterday’s recovery in the share price of A2 Milk Company Ltd (ASX: A2M) looks to be nothing more than a “dead cat bounce” as the stock comes under renewed selling pressure this afternoon.

Shares in the milk supplier has shed more than 15% of its market value since it issued a disappointing market update on Tuesday as the stock sank a further 4.3% to $10.29 at the time of writing, making it the third worst performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) after NIB Holdings Limited (ASX: NHF) and Vocus Group Ltd (ASX: VOC).

A dead cat bounce is a false recovery in a share price and the wild gyrations in A2 Milk’s shares is driven by investors who can’t decide if the milk glass is half-full or half-empty when management said its full year revenue would “only” increase by as much as 67%.

While that might sound like a great number to some, the range guidance was about 4% below consensus expectations. That may not sound like a big miss but what’s made it worse is that the market was expecting a revenue upgrade from the market darling whose share price has more than tripled in the past year when the top 200 stock index is up by a mere 6%.

What’s also adding to the volatility is conflicting analysis from brokers. While some are urging investors not to cry over spilt milk and to keep buying what is arguably the ASX’s biggest success story in the past year or two, Citigroup had opted to take a knife to A2 Milk’s valuation.

Citigroup has downgraded the stock to “neutral” from “buy” and as it lowered its price target on the stock by 20% to $11 a share, according to the Australian Financial Review.

The broker pointed to the increasing uncertainty over the stock’s short-term outlook as it transitions to a new packaging for its infant formula and is wary of price reductions in the Australian daigou network and Chinese online shopping platforms.

Daigous are personal shoppers who purchase infant formula in Australia to send to their Chinese clients. The lower prices will hurt margins and could prompt daigous to switch to other brands.

These do not pose a very significant threat to A2 Milk given what Bellamy s Australia Ltd (ASX: BAL) had to overcome when it was ostracised by the daigou community, but given A2 Milk’s rocketing share price and valuation, any uncertainty is sure to trigger a significant sell-off.

The poor sentiment has also hurt Bellamy’s as its share price shed 3.1% to $16.16 this afternoon, although baby formula-exposed Clover Corporation Limited (ASX: CLV) is bucking the trend and is up 2.9% to $1.30.

The share price of A2 Milk could stay under pressure in the short run and could even trade under $9 a share, but I suspect we will see good buying interest at those levels before the stock stages a recovery later this year.

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Motley Fool contributor Brendon Lau owns shares of Vocus Communications Limited. The Motley Fool Australia owns shares of and has recommended Vocus Communications Limited. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended NIB Holdings Limited. 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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