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Why A2 Milk Company Ltd (ASX:A2M) shares are sinking lower today

As was widely expected, the A2 Milk Company Ltd (ASX: A2M) share price has started the week deep in the red.

At one stage the infant formula and dairy company’s shares were down as much as 5% to $10.75. They have since retraced some of this decline but are still down 3.5% to $10.92 at the time of writing.

Why are A2 Milk Company’s shares sinking lower today?

As I mentioned here on Friday, a change of director’s interest notice released just before the market close revealed that the company’s new chief executive officer, Jayne Hrdlicka, has been selling shares.

In fact, just a touch over two months since joining the company, Ms Hrdlicka has offloaded all her ordinary shares, leaving her with just potential performance rights and time-based rights.

According to the change of director’s interest notice, last week Ms Hrdlicka offloaded a total of 357,232 shares through on-market trades on Tuesday and Thursday for an average price of $11.18 per share or a total of $3,995,139.80.

The release explains that the “sale of the above-mentioned Ordinary Shares has been made by Ms Hrdlicka in order to: (i) fund the tax obligations relating to the recent automatic exercise of timebased rights; and (ii) fund commitments made by Ms Hrdlicka prior to her taking up employment with the Company.”

While Ms Hrdlicka clearly has valid reasons for the sale of these shares, I completely understand why the market would respond negatively.

Firstly, the timing of the release was poor. Considering the share sales were completed on Thursday, releasing the notice just before the market closed on Friday doesn’t look great.

In addition to this, the share sales by Bellamy’s Australia Ltd (ASX: BAL) executives before its fall from grace a couple of years ago are likely to be fresh in the mind of investors. While I’m confident the same thing is not happening at a2 Milk Company, I can’t blame some shareholders for fearing the worst.

Should you buy the dip?

I’m not a big fan of companies that have CEOs with no skin in the game, so this is a disappointing development, especially so early in her tenure.

However, I remain optimistic that the company is performing to expectations and will deliver another strong result in FY 2019. As such, I would be tempted to pick up shares when the dust settles.

But if you’re concerned by the sales then I would suggest you wait for a trading update or its half year results next year before considering an investment. Until then, Bellamy’s or Freedom Foods Group Ltd (ASX: FNP) could be worth a look.

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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. The Motley Fool Australia has recommended Freedom Foods Group 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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