A2 Milk Company Ltd (ASX: A2M) shares have had an awful time of late.
The stock has lost more than 65% in the past 12 months, due to multiple forecast downgrades mainly from the impact of COVID-19 on its sales to China.
As of Friday morning, the A2 Milk share price stood at $6.38, compared to a 52-week high of $20.
However, Castle Point co-founder Stephen Bennie reminded everyone that it was an explosive growth story immediately before this.
The milk producer's revenue shot up from NZ$154 million to NZ$1.73 billion in just 5 years from 2015 to 2020.
"Similarly impressive growth occurred at the bottom line, with profits increasing from $2.4 million to $388 million in the same corresponding periods — an increase of 16,000%!" he wrote on Good Returns.
"Scant wonder the share price rose from 70c to $20 over those 5 years of remarkable growth, as the company became a significant player in the global infant milk powder industry."
So it is fair to say most of A2 Milk's shareholders would be growth investors.
But now the A2 Milk share price has plunged, has it actually become a value play?
How shares change hands from growth to value investors
Bennie used a simplified model from Dundas Global Investors to explain how a stock changes from value to growth and vice versa.
A value stock, once it appreciates, is sold off by value investors to realise their gains. The buyers are growth investors, who like the way the valuation is expanding.
A growth stock, when they deflate, is sold off by demoralised growth investors. The buyers are value investors, who are attracted by the low price and the potential to grow back again.
According to Bennie, despite the sharp sell-off, A2 Milk is not yet "ticking many of the boxes" for value investors.
"At current levels A2 is trading at a 380% premium to the book value of its assets, so it is not an asset play. It's not cheap in terms of current earnings or next year's expected rebound — the PE ratio for FY21 is 48x and for FY22 it's 25x."
The enterprise value of the milk maker is still more than 3 times annual revenue, which is still too high for value investors.
"The additional stumbling block for value investors with A2 is that its rise was so stratospheric and its subsequent fall so abrupt, that it is nigh on impossible to know what a bedrock steady state earnings might be — never mind trying to assess if it is cheap on that level of earnings."
When will we know if A2 is ready for value investing?
There is a simple observation that would indicate when value investors are finally comfortable with A2 Milk.
"A strong indication that [growth] investors are largely gone and that it's now mainly owned by cardigan-wearing value investors, is that the share price no longer goes down on bad news," said Bennie.
"That is because value investors are realists and accept that some bad news is part of life."
He added that growth investors "detest bad news" that confronts their optimism, so will sell at each negative development.
"Currently with the share price continuing to react badly to negative news, A2 clearly still has plenty of growth and GARP investors on the share registry," Bennie said.
"And likely only a handful of very early and unusually optimistic value investors."
