Will the class action against a2 mean more spilt milk?


Former stock market success story a2 Milk is in the news once again as Slater and Gordon file a class action on behalf of shareholders alleging that a2 Milk engaged in misleading or 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 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 more than 3500% in price, making it an investor's dream. Over the next 11 months to May 2021, it continued to fall away to a low of $5.04 suffering a fall of almost 75%.

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.

a2 milk slater and gordon class action

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 80-90% 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.

The best and worst performing sectors this week

The best performing sectors include Energy up more than 3% followed by Financials and Utilities, which are both up more than 2%. The worst performing sectors include Health, Information Technology and Communication Services, which are all down just under 1%.

The best performers in the S&P/ASX top 100 stocks include Worley Limited up more than 7% followed by QBE and Downer EDI, as they are both up more than 6%. The worst performing stocks include Magellan down more than 7% followed by a2 Milk, Fisher & Paykel and Washington Soul Patterson, as they all down more than 5%.

What's next for the Australian share market? 

The Australian stock market continues to exhibit indecision, as the bulls and bears battle for dominance. While the All Ordinaries Index is slightly in the green this week, the move is far from convincing.

Financial stocks make up around 30% of our market, which held up the All Ordinaries Index this week given that all of the big four banks together with Macquarie and QBE have traded up. In other words, there are only a few companies stopping the market from falling away, and if financials turn down then the market will fall heavily.

We are still in the timeframe for the low to occur and I still believe the Australian stock market may fall further with my target for the low below 7200 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.

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Dale Gillham is chief analyst for Wealth Within (AFSL 226347). He has an Advanced Diploma and Diploma of Share Trading and Investment and more than 25 years' experience in the financial services industry.