Shares in ex-market darling The A2 Milk Company Limited (ASX: A2M) have made a strong recovery this month – up over 32%.
Compared to where A2’s shares were trading at last year however, the recovery still seems quite a way off.
A2M share price chart
Optimism improves
Given the recent strong performance of some of A2’s competitors including Bubs Australia Ltd (ASX: BUB), investors are likely using this as a proxy for A2’s own recent performance. This is despite the fact that A2 has not provided a trading update for quite some time.
The strong results coming out of Bubs was largely thanks to its corporate daigou channel, which relies on businesses buying and sending products back to China rather than tourists and students.
Given that the daigou channel was all-important to A2’s success, it’s possible that A2 is also seeing an uptick through this channel. Although without any official updates from A2, it’s mainly just speculation at this point.
What else?
Brokers are also looking more optimistic on A2’s shares. Citi has retained its own buy rating citing strong performance from multinational competitor Danone SA.
This growth was largely seen in its China baby formula business channels. This could bode well for A2 given that it sells into the same market.
A2 has previously been a heavily shorted stock on the ASX. However, in recent days, the percentage of shares held short has fallen by over 50%. As investors are feeling more optimistic, I suspect many have closed out their short positions which has further pushed up the price of A2’s shares.
Summary
A2 is expected to provide an update to the market next week regarding its strategy in China. While demand could be picking back up, I’d also like to see how A2 is addressing its excess channel inventory and what this could mean for write-downs on existing stock.
I’ll be sitting on the sidelines for now.
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