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Why A2 Milk Company Ltd (ASX:A2M) shares surged higher today

Although it has given back its gains now, at one stage today the A2 Milk Company Ltd (ASX: A2M) share price had defied the market selloff and climbed 4% to $10.03.

At the time of writing its shares are still performing better than the market but sit flat at $9.64.

Why did a2 Milk Company’s shares surge higher today?

With no news out of the infant formula and dairy company, today’s gain is likely to be attributable to a reasonably positive broker note out of Citi.

According to the note, the broker has taken its sell rating off a2 Milk Company and upgraded its shares to a neutral rating.

Citi has also lifted the price target on its shares to $10.40. This price target implies potential upside of almost 8% from the current share price.

Why has the broker upgraded its shares?

When Citi downgraded a2 Milk Company’s shares to a sell rating in August, it did so on the belief that the company was experiencing a build-up of excess infant formula inventory both at home and in China.

The broker feared that this could prevent the company from delivering on the lofty expectations that the market had for growth in FY 2019.

Pleasingly, Citi believes that these issues have now eased and is much more comfortable with its inventory status. And while it doesn’t necessarily believe the issue is gone for good, it is confident that any issues would be only temporary.

What now?

Although the upgrade has only put its shares on a neutral rating, shareholders will no doubt be relieved that the sell rating has been taken off.

Especially given how sentiment had shifted negatively in recent weeks after its CEO, Jayne Hrdlicka, sold all her shares through on-market trades after just over two months in the top job.

Should you invest?

Despite the disappointing share sales, I think a2 Milk Company would be a great buy and hold investment along with the likes of Bellamy’s Australia Ltd (ASX: BAL) and Freedom Foods Group Ltd (ASX: FNP).

Though, it is worth pointing out that the company is likely to provide a trading update at its annual general meeting next month. This could make it prudent to wait for that update before investing.

If you plan to wait then this buy-rated tech share could be the one to buy instead.

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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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