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…

| More on:
three yellow exclamation marks on blue background

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

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.

More on Share Market News

A smiling businessman in the city looks at his phone and punches the air in celebration of good news.
Broker Notes

These ASX 200 shares could rise 50% to 60%

Brokers believe these shares could deliver big returns for investors.

Read more »

A girl is handed an oversized ice cream cone with lots of different flavours.
Best Shares

8 ASX All Ords shares that tripled in value in FY25

Just 8 out of the 500 companies making up the ASX All Ords achieved share price growth of 200% or…

Read more »

Broker written in white with a man drawing a yellow underline.
Broker Notes

Brokers name 3 ASX shares to buy today

Here's why brokers are feeling bullish about these three shares this week.

Read more »

Woman with a scared look has hands on her face.
Broker Notes

Bapcor shares fell more than 30% yesterday. Should investors buy in the dip?

Is this a value opportunity?

Read more »

A man sits thoughtfully on the couch with a laptop on his lap.
Broker Notes

Broker raises price targets on 2 ASX 200 shares to buy

Ord Minnett has just upped its 12-month share price targets on 2 buy-rated ASX 200 stocks.

Read more »

Man with rocket wings which have flames coming out of them.
Share Gainers

Guess which ASX All Ords stock just rocketed 34% on strong earnings growth

Investors just sent this ASX All Ords stock surging 34%. Here’s what’s happening.

Read more »

A male investor wearing a blue shirt looks off to the side with a miffed look on his face as the share price declines.
Share Fallers

Why DroneShield, Gentrack, Metals X, and Northern Star shares are tumbling today

These shares are ending the week in the red. But why?

Read more »

A businessman looking at his digital tablet or strategy planning in hotel conference lobby. He is happy at achieving financial goals.
Share Gainers

Why Dimerix, Newmont, Regal Partners, and Titomic shares are storming higher

These shares are having a good finish to the week. Let's see why.

Read more »