A2 Milk: Cash Cow or Spoilt Milk?

As investors, we find success by analysing companies and uncovering their untapped potential.

Hopefully that creates an edge in your trading.

It also allows you to catch red flags and mitigate any potential future losses.

Well today, we found a big blaring red alarm on a stock we looked at last week…

And I’ll tell you all about it, but first, a moment of silence for the 10-year anniversary of the Great Financial Crisis.

10 years ago last week, investment bank Lehman Brothers collapsed.

It triggered an economic crisis that would shake the foundations of nations around the world.

In the US alone:

  • House prices fell 31.8%
  • Unemployment skyrocketed to double digits
  • $350 billion in stocks were purchased by the Treasury
  • Financial institutions experienced a $140 billion bank-run on money market accounts
  • President Obama launched a $787 billion stimulus package

It was no small matter.

In the US especially, it created a scar on the investor’s psyche that would last generations.

But in New Zealand, the effect — and the memory — of the Great Financial Crisis was much shorter-lived. Home prices dipped, sure. Unemployment temporarily bumped up a point or two. But it was much more like a gradual plateau than the steep cliff-face we experienced in the US.

And now, I fear that many New Zealanders are forgetting what a bear market feels like. What it’s like to watch your equity erode before your eyes. To watch helplessly as your retirement dreams make way for mere survival.

Since we’ve forgotten all about the GFC, are we doomed to repeat it?

 

CEO selloff

One of the early warning signs of a crisis is chief officers selling off stocks in their company.

It makes sense, right?

Who has more information about the future of a company than the chief officers themselves?

And for many of them, a large chunk of their wealth is tied up in their allotted shares. So, when they start selling, they’re doing so in their own personal interest.

But if they hold on, it gives investors a slight bit of confidence in knowing that the most up-to-date shareholders are opting to stick with it.

Just before Enron’s collapse in 2001, its group of 29 executives and directors began selling off their shares. What a red flag that was…and yet many investors stayed aboard the sinking ship.

Today, we’ve observed echoes of Enron’s past showing up in the headlines.

A2 Milk Company Ltd (ASX:A2M) CEO sells shares: Time to panic?

The Motley Fool

a2 Milk boss Jayne Hrdlicka sells company shares only two months into job

New Zealand Herald

New a2 Milk boss sells all her shares

Rural Life

Jinkies! A brand-new CEO steps into her new job, takes one look at the books and sells everything — $4.3 million?

That certainly makes me sweat a little…

Especially after we lauded a2 for successfully penetrating the Chinese market just a few days ago…

So, which is it?

 

A Chinese plot twist?

According to a statement by a2, the new CEO, Jayne Hrdlicka, sold her shares to ‘…fund commitments made by Ms Hrdlicka prior to her taking up employment with the company.

She made $4.3 million in ‘commitments’ before taking the job?

That doesn’t sit right with me…

For her to do something so drastic and so potentially damaging to the company, there must be an urgent reason.

Either she has a personal situation where she needed a quick $4 mil…or she saw something that drove her to jump straight off the boat.

Both scenarios leave me a little worried.

And maybe they should worry you too.

Paul Glass of Devon Funds said it well, as reported by the New Zealand Herald:

It’s a really interesting decision for a new CEO to dump every share she owns, excluding options, just a couple of months into the new job and at a time when there is a lot of uncertainty hanging over the A2’s sales channels following the release of new Chinese regulations over e-commerce that come into effect from January 1.

As you’ll recall from our article last week — Milking China: a Kiwi Conundrum — a2 Milk’s exclusive supplier, Synlait Milk Ltd [NZX:SML], recently raised heads by posting an 89% increase in net profits.

For us, it was a sign that the a2/Synlait duo had successfully broken into China with their baby formula.

And investors seem to agree. Over the past 24 months, Synlait’s stock price shot up 353%.

But now we see Ms Hrdlicka selling every single share? Right after joining the firm? And just before Chinese regulation on a2’s e-commerce strategy kicks in?

Like I said, it doesn’t sit right…

I hope — for the sake of a2, Synlait and every one of their investors — that whatever Ms Hrdlicka needed that money for was worth it.

 

What does it all mean?

As I see it, you’ve got two ways to read this situation:

  1. Ms Hrdlicka sold her shares because of her inside knowledge of the firm’s future…particularly in relation to the looming Chinese regulations. If this is the case, the obvious message is that a2 is in trouble.
  2. Ms Hrdlicka’s decision to sell was separate from the performance of the business…which actually looks strong at this time. The market selloff could be emotional. As a rational investor, this might be a time to lock in a nice discount. In fact, at the time of writing, a2 Milk Company Ltd [NZX:ATM] is down by nearly 5%.
NZX

Source: NZX

[Click to open new window]

While Ms Hrdlicka’s actions are concerning, like everyone else, all we can do is speculate on the situation. There’s not enough concrete evidence to tell us whether investors should be concerned by what’s taken place. We’ll just have to wait and see where this wild ride goes next.

Best,
Taylor Kee
Editor, Money Morning New Zealand


Taylor Kee is the lead Editor at Money Morning NZ. With a background in the financial publishing industry, Taylor knows how simple, yet difficult investing can be. He has worked with a range of assets classes, and with some of the world’s most thought-provoking financial writers, including Bill Bonner, Dan Denning, Doug Casey, and more. But he’s found his niche in macroeconomics and the excitement of technology investments. And Taylor is looking forward to the opportunity to share his thoughts on where New Zealand’s economy is going next and the opportunities it presents. Taylor shares these ideas with Money Morning NZ readers each day.


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