The A2 Milk (ASX:A2M) share price is up 17% in the last month, here’s why

The Kiwi dairy producer has given plenty of headaches for investors, but the stock seems to have turned around recently.

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A2 Milk Company Ltd (ASX: A2M) shares have gone gangbusters in the past month, rising more than 16.6%.

But of course, that’s after its investors cried over much spilt milk in the past year. The stock has lost more than 63% in the past 12 months.

This month has seen the agricultural stock become one of the most traded among Australian investors, with it involved in 2.1% of all transactions on CommSec last week.

Pleasingly, buyers accounted for 71% of that volume.

So what’s with the July revival?

Acquisition about to complete

A2 Milk’s proposed majority-acquisition of Mataura Valley Milk will complete by the end of this month.

That follows a 5 July blessing from the New Zealand Overseas Investment Office, which sent the shares rocketing up.

“Management expects the acquisition to provide the opportunity for a2 Milk to participate in nutritional products manufacturing, provide supplier and geographic diversification, and strengthen its relationship with key partners in China,” reported The Motley Fool’s James Mickleboro at the time.

Analysts warming to A2 Milk

Fund managers are starting to take notice of A2 Milk, with some arguing the stock has been oversold.

Bell Potter senior industrial analyst Jonathan Snape said last week that the business was absolutely flying before COVID-19 took hold last year.

So A2 Milk could be a nice pandemic recovery story.

“While not without near-term risks as supply chains stabilise, at its core we see A2M as a business that, once [margin] is consolidated, has baseline revenue of ~NZ$1.4 to $1.5 billion and EBITDA of ~NZ$300m,” he said in a memo to clients.

Snape can see A2 Milk hitting NZ$1.7 billion in revenue with NZ$445 million EBITDA.

Watermark portfolio manager Daniel Broeren posted on Livewire that the A2 Platinum formula brand continues to be popular with Chinese mothers.

“While there are some risks around market size (declining birth rate), and recovery timeline for Chinese travellers (daigou), these are palatable risks when the stock is trading at such a significant discount to prior valuations.”

Still plenty of short interest on A2 Milk 

While the discounted share price has won over some fans, there are still plenty of sceptics.

Last week, The Motley Fool reported A2 Milk shares had re-entered the top 10 most shorted stocks on the ASX.

About 6.8% of its shares have been shorted, on the back of worries about the still-depressed daigou sales channel and the competition from Chinese baby formula makers.

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Motley Fool contributor Tony Yoo owns shares of A2 Milk. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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