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This S&P/ASX 200 star has slumped 18% in 6 months: Is it time to buy?

A lot of investors chasing growth look to particular themes or tailwinds in an attempt to identify the companies and shares most likely to grow strongly over the next 5 to 10 years.

For example, healthcare operators like Ramsay Healthcare Limited (ASX: RHC) or Healthscope Ltd (ASX: HSO) are liked by some investors thanks to the ageing population and rising standards of living globally equalling higher healthcare spends.

Other investors believe the rise of the Chinese middle-class consumer and his or her combined spending power could lift small Australian companies higher going forward.

For example, the likes of Treasury Wine Estates Ltd (ASX: TWE), Bellamy’s Australia Ltd (ASX: BAL) and Bubs Australia Ltd (ASX: BUB) are liked by some thanks to growing Chinese demand for their products.

However, probably the company most closely associated with the potential to benefit from the demand of Chinese consumers is A2 Milk Company Ltd (ASX: A2M).

Its shares are down 18% in 6 months to $9.60 despite the group revealing last August that it had more doubled its full-year 2018 profit to NZ$195.7 million. Earnings per share also climbed 113% to NZ27 cents.

The group has also reported that for the quarter ending September 30, 2018, it has continued to see “strong growth” in its “infant formula (English and China labels) and infant milk products”.

A2 Milk also takes a lot of its products from New Zealand milk supplier Synlait Milk Ltd (ASX: SM1), which a2 also owns shares in itself.

However, Synlait’s biggest shareholders by far are Chinese infant formula investors, which is relevant given the tricky regulatory environment in China.

It was Synlait itself that got the a2 Milk Company’s registration with the China Food and Drug Administration (CFDA), while other infant formula companies like Bellamy’s are reportedly still waiting on full approval.

The A2 Milk Company also has a potential competitive advantage as its a2-only-protein products are claimed to taste better by many consumers and to help or avoid potential allergies.

Its sales in China nearly tripled from NZ$88.9 million in FY 2017 to NZ$233.6 million in FY 2018.

It is also growing sales quickly in the Australian, United Kingdom, and the United States markets.

The downside is that the new CEO chose to sell her entire shareholding recently worth around A$4.2 million despite being in the job only just over two months.

The shares were sold at prices close to 20% above today’s price of $9.60 in a result that does not give much confidence in the business.

However, potential investors now are compensated by a much lower share price, although the CEO share sale looks something of a red flag until the next full trading update to consider in February 2019.

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Motley Fool contributor Yulia Mosaleva owns shares of Ramsay Health Care Limited. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended Ramsay Health Care Limited and Treasury Wine Estates 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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