Margin trading suspected as causing A2 Milk’s volatility
Extreme volatility in market favourite A2 Milk’s share price has been put down to possible margin-related trading.
The share price recovered lost ground after another extremely volatile trading session yesterday but was well off its lows after a meteoric run higher throughout most of the year.
A2, which markets an alternative A1 beta-casein-free milk, this year surpassed Fletcher Building and a handful of other market heavyweights in terms of market capitalisation.
The stock closed yesterday at $7.49, down 13c or 1.71 per cent, after plummeting early in the session to $6.80. Turnover was worth $27 million.
Fund managers said A2 was toppled from its record high of $8.75 when brokerage CLSA Australia changed its assessment of A2 to “underperform” from “outperform” on November 1, prompting an initial 8.4 per cent decline in the stock.
Extreme volatility in A2, and its associated supplier Synlait Milk, suggested high levels of margin trading, when investors borrow funds to buy shares using the stock as security, said Salt Funds managing director Matt Goodson.
“The volatility lately just demonstrates the amount of hot money that is in it,” he said.
“It certainly feels like there is some margin money in A2. At times, some of declines suggest the margin clerk has come knocking. The ascent was vertical, which also suggests there might have been some margin-type buying.”
Goodson pointed out that despite the decline, A2 Milk was still only revisiting levels seen in October. Even at yesterday’s close, A2 has gained 274 per cent over the past 12 months.
Fund managers said the company remained well regarded, particularly because of its success in negotiating the tricky unofficial “daigou” trade channels into the lucrative Chinese market. A2 has also enjoyed a series of earnings upgrades.
“But the question is, what should shareholders be paying for it,” Goodson said.
Last week, A2 received a please “explain note” from the NZX after the stock dived from $8.67 on October 31 to $7.58 the next day — a drop of $1.09 or 12.09 per cent.
The company replied that it remained in compliance with its disclosure requirements.
A2’s supplier, Synlait Milk, which has ridden the coat tails of A2’s ascent, has had a similarly rocky ride, falling yesterday to $6.99, down 28c or 3.85 per cent. In the past 12 months, Synlait — in which A2 has an 8 per cent stake — has risen 139 per cent.
Grant Williamson, a director at Hamilton Hindin Greene, said both stocks were seeing a good sized correction “which was always going to happen” after their rapid gains.
A2’s ascent made it one of the largest stocks on the local index, and its losses yesterday put “quite a weight” on the benchmark NZX 50 index, Williamson said.
“Synlait is very much just following A2, they’re joined at the hip to some extent. In these stocks, you get a bit of selling and it’s followed by more selling — it doesn’t take much. It’s difficult to know where it’s going to bottom out.”
Analysts expect to receive more guidance on how A2 is tracking at the annual meeting on November 21.