ATM - A2 Milk Corporation Limited

[dobby41]

I find the ad on the radio spruiking the company saying how popular the product is etc interesting.
Sounds like a financial report the way it is delivered.
Worrying really.

disc - don't hold

[Snoopy]

Hi SNOOPY, whenever I've done valuations for a company, I always put some real money to do a trade, as a reality check of my research work. So if I believe the company is cheap, then I will buy the shares, and vica versa. If I feel reluctant to play the real money, then I will not trust the research work done by myself. This approach seems working so far, as my NZX portfolio has been over-performing the NZX50 in the last 5 years.

I just wonder, if you believe A2 is worth only 13.3c, it appears no brainer to short-sell this company, at the current price. Are you willing to do the trade, as you will make a fortune if A2 drops to your valuation price?

'Put up or shut up', eh. Ok your post expressed that general idea in a far more polite way. But you are right, Bobxia. I do deserve to be called on this one.

This shorting thing often is bandied around the forum. But it is not that easy to do in practice. I know the NZX allows shorting of some top ten shares. But for a small investor like me, I am not sure that shorting a share like ATM is possible on the NZX. I have certainly never heard of any individual on this forum who has done it. The ASX however, does offer more possibilities , now that 'A2M' is listed 'over there'.

Take a look at this:

http://www.shortman.com.au/stock?q=A2M

It does show that some limited shorting is happening. But it also shows that the percentage of shares shorted is 0%, IOW within the margin of error. So maybe I could do it? I would be interested in 'Sharetraders' who have actually shorted a less liquid share like ATM/A2M, exactly how they have gone about it.

I have never shorted a share myself so far, but this is for more philosophical reasons. Unlike share investing, share shorting is a zero sum game. I am not sure I would feel right using my analytical skills to profit from someone else's lesser skilled misery.

I can buy a share and hold it indefinitely, if I so choose. But if I short a share, I can can only sell what is in effect a put option at some future date, typically one or two years into the future. It is true I currently believe that A2 shares will undergo a significant correction. But I have never claimed to be able to predict the timing of this. It is quite possible that A2 shares could remain in a $1.80 to $2 band for two years. Thus my put option could remain out of the money for its whole life. Or put another way, the market could remain irrational longer than I can remain solvent.

If I could buy, say, a ten year put option for A2 milk then there is every chance I would do so. However, as far as I am aware I cannot do this. Very happy to be proved wrong on this one though.

SNOOPY

PS my 13.3c valuation is based on a2 milk retreating to Australia and New Zealand, pulling the pin on further global expansion. But it is also based on a PE of 20 which means I forecast solid growth in the home market for some years. As I have said before, I believe that view is vey likely too conservative. But it does provide a baseline of how to value A2 milk as it expands into other markets.

[airedale]

Hi Dobby, which radio station did you hear the ad?

[dobby41]

Hi Dobby, which radio station did you hear the ad?

The Sounds
Heard it just about everyday on the way to work and at other times.
Scary really.

[bobxia]

You raised a good point Snoopy, the market can be irrational, and the "timing" is not easy to predict. The timing may not be as important when you are trying to make a big call, e.g. you are calling for a big correction like more than 50%, rather than 2%.

If you worry to be wrong to short-sell for the first 1 or 2 years, you could try only bet a potion of your planned capital (like 30%) to start with, and add-on positions if price goes up. By doing this approach, you will be benefit regardless of the share price movements, i.e. you make profit if price goes down, or adding more positions at better levels if price goes up.

Eventually, you will make a big profit when the market becomes rational again, i.e. dropping back to the true valuation.

There are few ways to short this stock. Not sure who's your broker, but have a chat with your broker. They maybe able to borrow ATM (at your cost), and sell it for you. I can also give you my contact from Leveragedequities, who's a subsidiary of For barr and offer short-selling service. Let me know if you want the contact.

You are right, you can also short-sell A2M. You can simply open a CFD account with IG Market, and selling ASX stocks is very simple on their platform.

If you haven't done short-selling before, it can be a good experiment to do it will be interesting to see if your view changes when you have a position on.

[Harrie]

I have never shorted a share myself so far, but this is for more philosophical reasons. Unlike share investing, share shorting is a zero sum game. I am not sure I would feel right using my analytical skills to profit from someone else's lesser skilled misery.

That's about the most arrogant statement I have ever read on ST.


Happy to be a person with lesser intellectual ability for you to take money off and provide you with an option that the market can't do for you currently. I can undertake to provide you with an opportunity to put your money where your superior analytical skills lie by entering into a legally binding options contract giving you a 564% premium over your valuation in 5 years time. Lets enter into a contract where you agree to sell me 500000 ATM shares @0.75 in 5 years time. That should be a no brainer to you because based on your own analysis you would be selling me shares at $0.75 when the market at that point would be around 13.30 cents. So you would buy the 500000 shares on the market at a price less than $0.75 and I would have a legal obligation to buy these and settle with you for $375000. Alternatively if the sp is greater than $0.75 then you would cash settle me for the difference between the option price and the market price.

[Snoopy]

Snoopy wrote:
"I have never shorted a share myself so far, but this is for more philosophical reasons. Unlike share investing, share shorting is a zero sum game. I am not sure I would feel right using my analytical skills to profit from someone else's lesser skilled misery."
That's about the most arrogant statement I have ever read on ST.

Happy to be a person with lesser intellectual ability for you to take money off and provide you with an option that the market can't do for you currently. I can undertake to provide you with an opportunity to put your money where your superior analytical skills lie by entering into a legally binding options contract

I said nothing about skills equalling intellectual ability Harrie. That is entirely your construct. Skills tend to come from experiences both good and bad. Skills require application rather than 'superior intellectual ability'. I think I have been around this forum long enogh to claim some skills at least. Please don't read things into my statements that are not there.

Lets enter into a contract where you agree to sell me 500000 ATM shares @0.75 in 5 years time. That should be a no brainer to you because based on your own analysis you would be selling me shares at $0.75 when the market at that point would be around 13.30 cents.

You want to have a $375,000 contract bet with me do you, all on one speculative share?

The 13.3c valuation was based on Australia and New Zealand only, and based on FY2015 results. I never said it was my valuation of the company. So why will my valuation of the company be 13.3c in five years again? May I suggest you become a little less impulsive and brush up on your comprehension skills. I have no doubt you have the intelligence to do so :-).

SNOOPY

[bobxia]

In terms of the 10 year Put option idea Snoopy, you are right that there's no option market for A2 for that long. However, even there's such a market, you need to pay a big premium, as the volatility for A2 is high, which will be reflected in the option pricing. You may need to pay something like 40% or 50% (or even more) of the face value for a at-the-money option.

Given you are so bearish about this company, you probably believe A2 will not go up another 50% in the future. So there's a way that you can do an outright trade, but have the same effect as doing a put option. You can simply sell the stock, with a stop-loss level of 50% above the entry-price. This might be a better way, as you don't need to pay the expensive premium upfront, so more savings of opportunity cost.

May I ask, if you do decide to sell, what's your profit-target might be?

[Harrie]

The 13.3c valuation was based on Australia and New Zealand only, and based on FY2015 results. I never said it was my valuation of the company. So why will my valuation of the company be 13.3c in five years again? May I suggest you become a little less impulsive and brush up on your comprehension skills. I have no doubt you have the intelligence to do so :-).

I'm not sure I have met anyone that has developed analytical skills without having some intelligence Snoopy. Your skills definition is therefore just a thinly disguised way of demonstrating how much more intelligent you are than the rest of the unskilled contributors to ST.
Wasn't it you that put generous earnings multiple of 20 times on current earnings? Based on your own analysis at this multiple you should not expect to see the SP move much more than your 13.3c per share, that's why I have given you a wide berth of a 564% premium, ie I have already discounted some growth in the next 5 years based on your current valuation model. If we assume a 20% compound growth on your current valuation it would bring you up to a SP of 33c in 5 yrs, thus still providing a premium of around 130%. That's pretty generous I would have thought on my behalf to volunteer to take such a hit on an options contract!
My offer still stands.

[PartTimeTrader]

I don't know why people are being so overly sensitive. Anytime you are investing in a company without a proven track record of profits you are creating a valuation based on your faith in the company/product's long term earnings potential. There are going to be huge differences in valuations compared to valuations of long established companies where you can take an existing earnings history and factor in slight growth/decline in earnings over time.

I've put in 500k into NZX/ASX equities during this volatile Jan period. It's weighted 70% towards established businesses where I think the industry hasn't reached a declining phase yet or has small growth potential (its always easier to justify buying when market crashes as well). I've also put 30% towards a variety of biotech/tech type companies but they are spread quite widely between several high potential companies, several of them could turn out to be worthless in a few years time while others may return 1000%+. Anyone going heavily weighted on a single biotech/tech stock that hasn't proven itself yet is just gambling regardless of whether you are short/long on that stock.

*Disc I purchased 30k shares of A2 at 50cents, sold at $1.25 a few months later, it sucks seeing it go to $2 but I don't have any strong regrets.