Will A2 Milk Fall as it Faces a Class Action?

Former stock market success story A2 Milk is in the news once again as Slater and Gordon have filed a class action on behalf of shareholders alleging that the A2 Milk Company engaged in misleading and deceptive conduct between August 2020 and May 2021. The question for shareholders right now is whether this class action will negatively impact the share price of A2 Milk.

A2 Milk unlikely to recover in the short term

A2 Milk listed on the ASX in March 2015 and in the five years to June 2020, it had risen to an all-time high of $20.05 or over 3,500 per cent in price, making it an investors dream. Over the next 11 months to May 2021, it continued to fall away to a low of $5.04 suffering a loss of almost 75 per cent.

While I won’t comment on the class action, I think it is pertinent to point out that the uncertainty created by the COVID pandemic caused many companies to struggle with providing accurate financial guidance to the market, as there were simply too many lockdowns, which impacted on supply chains.

Unfortunately, those investors who bought into A2 Milk between September 2020 and May 2021 were buying when the stock was falling in price with the expectation that it would return to delivering the speculator returns of the prior five years. However, rather than getting a good buy, they have said goodbye to their money. So when do we expect A2 Milk to turn around?

Warren Buffett is famously quoted for saying ‘buy in doom and sell in boom’, and right now with A2 Milk facing a class action, there could not be more doom but does this spell opportunity? Absolutely, but not just yet.

While I believe A2 Milk has fallen at least 80 to 90 per cent of what the total impact will be, it may still fall to around $2 although I am confident it is near the end of its current move down. In fact, we may have already seen the bottom but it is too early to tell. Regardless of what unfolds with the class action short term, I think investors will be rewarded over the longer term.

What were the best and worst performing sectors last week?

The best performing sectors included Energy up 4.63 percent followed by Financials up 3.29 per cent and Utilities up 2.92 per cent. The worst performing sectors included Health Care down 0.10 per cent followed by Industrials up 0.37 per cent and Communication Services up 0.72 per cent.

The best performers in the S&P/ASX top 100 stocks included Worley Limited up 9.77 per cent followed by QBE Insurance up 8.13 per cent and AGL Energy up 7.94 per cent. The worst performing stocks included Fisher & Paykel down 5.86 per cent followed by Domino’s Pizza down 5.47 per cent and Washington Soul Patterson down 5.41 per cent.

What's next for the Australian share market?

The Australian stock market continues to exhibit indecision, as the bulls and bears battle for dominance. Last week it spent half the time moving up and the other half moving down until Friday when the market rose almost 1 per cent with the All Ordinaries Index finishing the week up 1.75 per cent in its strongest close since early August.

Last week, the Financial sector was up 3.29 per cent while the Materials sector was up 2 per cent, and with the big miners also rising strongly, it held up the All Ordinaries Index. This is the challenge with our stock market because when the Financials and Materials sectors move together, they take the market with it. In essence, it was only a small number of companies that stopped the market from falling heavily last week.

We are still in the timeframe for the low to occur and while we may have already seen it, I still believe the Australian stock market could fall further with my target for the low below 7,200 points, which I expect will occur anytime between now and mid-October.

As I have previously stated, now is the time to be patient rather than trying to grab a bargain, as you may be disappointed. The market will settle in the next month and you will be rewarded for your patience, as there are many good buying opportunities unfolding.

For now, good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.