More than milk driving A2’s share price

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Sam Dickie, Senior Portfolio Manager

More than milk driving A2’s share price

A2 Milk has been ripping, up 390% since the start of the year.

The strong share price performance partly reflects a very impressive earnings upgrade cycle on the back of A2’s highly successful entry into the Chinese infant milk formula market.

More than milk driving A2’s share price

However more recently, the daily volume traded in the stock has exploded, especially the Australian listing. A2 was dual listed in Australia in March 2015. Initially the volumes traded were tiny. More recently the volumes transacted on the Australian bourse have been three times those traded in New Zealand.

This culminated on 1 November when the daily traded volume in Australia was more than six times the volume traded here. More importantly, the value of A2 Milk shares changing hands across both listings was almost NZ$300m. That equates to more than 5% of the company traded in a single day on basically no news flow. CLSA, a Hong Kong based broker, had downgraded the stock to underperform and the NZD rallied a little but apart from that, there was no actual news.

We looked back over history to see if there has ever been another NZ listed company that has traded as much as NZ$300m in a single day. In the absence of some sort of capital raise or placement of a block of shares we couldn’t find one. This is unprecedented.

This was intriguing to us so we dug a little deeper. When we look through which brokers traded the majority of the stock, it is dominated by low cost online or retail stock brokers in Australia and Asia. These brokers are the go to trading houses for day traders, high frequency traders and algorithmic trading. In other words, very fast money traders that are much less focussed on fundamentals than they are on momentum.

The point here is that even in New Zealand hot stocks are increasingly trafficked in by offshore fast money, day traders and algorithms. This significantly heightens risks and volatility both to the upside but also to the downside.

Our response to this type of fast money, hot stock trading, is to stick to understanding the fundamentals of the businesses we invest in. We will continue to invest in high quality companies with high quality management teams and sustainable competitive advantages that are trading at prices we believe are sensible. We’ll leave the day trading to the computers.


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