While a good number of shares sank deep into the red during today’s market selloff, few fell as hard as the Bubs Australia Ltd (ASX: BUB) share price.
The goat milk infant formula company’s shares finished the day 12% lower at 49 cents despite there being no news released.
At one stage its shares looked set to make a new 52 week low of 46 cents but stopped short at 47 cents before recovering slightly.
Why are Bubs’ shares sinking lower?
Almost all infant formula shares have been under pressure today. A2 Milk Company Ltd (ASX: A2M) shares fell 3%, Bellamy’s Australia Ltd (ASX: BAL) dropped 6%, and Wattle Health Australia Ltd (ASX: WHA) tumbled 4%.
As these shares trade on premium valuations, I suspect investors may have been hitting the sell button in a panic after bond yields widened.
As the risk-free rate increases, so too does the required rate of return on investments. This is because if investors are going to take on risk, there needs to be a sufficient reward.
In order to gain a greater rate of return on an investment to compensate for a higher risk-free rate, a share needs to be trading at a more attractive price. This inevitably leads to shares rerating to “fairer” multiples.
Is now the time to invest?
While I think a2 Milk and Bellamy’s are in the buy zone now for patient investors, I’m not so sure about Bubs. Although its shares are within a whisker of their 52-week low, they are still trading at approximately 13x sales.
As a comparison, a2 Milk and Bellamy’s are trading at just over 8x and 3x sales, respectively.
Unless Bubs delivers some stellar sales growth in FY 2019, I fear its shares could be dragged even lower in the coming months.
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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.