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Is the Huon Aquaculture share price set to rise?

The Huon Aquaculture Group Ltd (ASX: HUO) share price has fluctuated over the past 12 months. The share price peaked in February, at $5.10 per share, but has since returned to a price only marginally higher than where it started the current financial year.

The lack of growth in the Huon Aquaculture share price contrasts the S&P/ASX 200 (INDEXASX: XJO) index, which has gained more than 7% over this same time period.

It also contrasts the share price of ASX-listed competitor, Tassal Group Limited (ASX: TGR), whose shares have gained almost 25%.

Why have HUO shares been left behind?

Huon Aquaculture recently released further guidance on their 2019 financial results. In this update, result expectations were downgraded due to continued impact from higher water temperatures in Tasmania, a jelly fish bloom, and gill necrosis. The conditions described and their impacts on Huon Aquaculture make it understandable why the HUO share price has not seen any significant success.

In a market briefing, Tassal also mentioned being impacted by the jelly fish bloom. Based on the TGR share price, however, it doesn’t appear that the market is as concerned by this impact. The Tassal share price continues to ride high after half yearly results that were described as their ‘best ever’.

The future of salmon farming

Both Huon Aquaculture and Tassal have described favourable market conditions going forward; that is, growing demand for salmon that will continue to outstrip supply. If this is the case, I expect both companies to do well into the future. However, limiting the impact of environmental factors on salmon production will be key. Establishing a competitive advantage will also be something to focus on.

Obtaining a true competitive advantage is a lot easier said than done. One possible path to this might be developing farming practices that dramatically reduce environmental impact. This would give consumers a genuine reason to pay a higher price or select a specific brand. Huon Aquaculture’s movement into higher energy farming zones is a good start.

Foolish takeaway

At their current prices I don’t believe Huon Aquaculture or Tassal seem overly expensive. However, given the risk associated with salmon farming, I believe there are more attractive investments elsewhere. The development of a competitive advantage or a sustained period of success by either company may make me reconsider this view. I will also be looking forward to seeing the full-year results of Tassal to see how well they were able to handle these tougher environmental conditions.

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Motley Fool contributor Mitchell Perry has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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