3 warning signs for the a2 Milk (ASX:A2M) share price

Here are three warning signs that the A2 Milk Company Ltd (ASX:A2M) share price could underperform in the near term…

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I’m a big fan of A2 Milk Company Ltd (ASX: A2M) and believe it is a great long term option for investors.

However, I feel there are a few warning signs at present which indicate that the a2 Milk share price could underperform in the near term.

What are these warning signs?

Heavy insider selling.

The first warning sign to be aware of is the rampant insider selling that has been taking place in recent weeks. A large number of executives have been selling millions of dollars’ worth of shares. This includes its chairman, its CEO, its chief growth and brand officer, and its Asia Pacific chief executive. The latter offloaded over NZ$15 million of shares at the end of August.

Rising short interest.

Another warning sign is the company’s rising short interest. A growing number of short sellers are betting on the a2 Milk share price losing value in the near future. Over the last three months short interest has grown from 3.8% to 6.2%. This makes a2 Milk the 15th most shorted share on the Australian share market at present.

Inventory concerns.

A final warning sign is the company’s increasing inventory. At the end of FY 2020, a2 Milk reported a 36% increase in total inventories to NZ$147.3 million. As there are concerns that the panic buying from the pandemic may have brought forward sales from future periods, investors appear worried that the company will have excess stock on its hands. In fact, the company recently advised that it is seeing an unwind of third quarter pantry stocking in the early part of FY 2021.

What should investors do?

As I said at the start, I believe a2 Milk could be a great long term option. This is due to its popular brand, modest market share in China, and potential value accretive acquisitions thanks to its hefty cash balance.

But given the aforementioned warning signs, if you want to buy and hold its shares, I would suggest you consider buying half your desired holding now and then the other half when the current uncertainty eases.

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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.

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