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As the a2 Milk share price rebounds, 9% of traders remain short

With the a2 Milk (ASX: A2M) share price regaining momentum in recent times, we examine the potential reasons behind the recent uptick in short interest.

a2 Milk share price in focus Source: Bloomberg

A2 Milk share price: a short story

A glance at the short interest on a stock gives you a good gauge of the general sentiment behind it.

a2 Milk (ASX: A2M) – once a market darling and still maybe one again – proves an intriguing case study on this front.

Indeed, the last time we covered the short interest on A2M – we wrote:

‘As it stands, a sizable 51 million of the 735 million shares on issue are currently held short, equating to roughly 7.01% of A2M's issued stock.’

Writing that on September 20, A2’s stock would continue fall soon after. By November 6, a2 Milk’s share price was down more than 9%.

Short sellers indeed must have felt vindicated – at least for a short while. That moment of vindication did not last long though – in the last month or so the a2 Milk (ASX: A2M) share price has ran up more than 30%.

Prior concerns that A2M was spending too much on marketing look to have evaporated – with the company’s now ex-CEO – Jayne Hrdlicka – recently pointing out that earnings (EBITDA) margins were expected to come in higher than previously flagged during FY20.

Even Hrdlicka’s ousting – announced soon after that upward margin revision, could not wash away the new found optimism around the stock.

Yet as the share price has rebounded, short interest has not dissipated.

Why are investors still short then?

Ultimately, there are more investors holding short a2 Milk’s stock now than there were when we covered this topic in September.

Short interest currently sits at 9.88%, some 2.87% ahead of our previously reported on levels.

One is left wondering then: what is it that galvanised short sellers between then and now?

Some answers may be found in the musings of Citibank analysts, who remain bearish on A2’s prospects.

For example, while Citibank analysts did comment on A2M's stronger than expected earnings (EBITDA) margins for FY20, the broker ultimately expects margins to come under increasing pressure in the medium-term.

This is primarily because Citi expects that competition in the Chinese IMF market will increase over the medium-term and the shift away from Daigou channels and into direct ones will also contribute to margin compression.

In line with this, though Citi upgraded their FY20 EPS estimates (due primarily to the recently revised earnings margins guidance), they lowered their FY21 to FY22 EPS estimates by 1% and 4%, respectively.

In step with that, Citi reiterated their SELL rating and a bearish price target of $12.30 per share on the company.

At a2 Milk’s current price levels – should Citi’s price target prove correct – short sellers could be looking at realising low double-digit percentage gains, not factoring in the costs associated with short selling and other considerations.

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