Australia Markets open in 53 mins

Should you capitalise on the infant formula boom?

James Mickleboro

The retail sector may be a bit hit and miss right now, but one product that is certainly a hit is infant formula.

Also read: Is this why you can't get the job you want?

So much so, there have been reports in the press that some Woolworths Group Ltd and Coles supermarkets have had to put the product behind the counter alongside cigarettes in order to limit the number of products a single consumer can buy.

Also read: Budget tax cuts will only help the rich get richer

The reason for the demand is of course daigou shoppers which are buying infant formula and then selling it directly to China-based consumers at inflated prices.

Clearly this is a sign that the insatiable demand for infant formula in China is continuing to grow, putting Australian and New Zealand producers in a great position to profit.

But which infant formula shares should you buy?

A2 Milk Company Ltd(ASX: A2M)

This infant formula and dairy company would have to be my top pick in the industry. With all its licences in place, I suspect a2 Milk Company is taking advantage of the reduced competition in the market to win an even greater share. Its shares do trade at a premium, but I expect its long-term earnings growth will more than justify this.

Bellamy’s Australia Ltd(ASX: BAL)

My next favourite in the industry is Bellamy’s. As long as Bellamy’s receives its CFDA accreditation to sell product in China in the near future, I believe a combination of growing demand and price increases will put Bellamy’s in a position to deliver outsized earnings growth in FY 2019. This could make it worth picking up shares today.

Bubs Australia Ltd(ASX: BUB)

I think that this goat milk infant formula company could have a bright future if Chinese consumers take to its products. The company has signed numerous agreements which give it a far-reaching distribution network in both Australia and China. All it needs now are its accreditation and demand from consumers.

Jatenergy Ltd(ASX: JAT)

Jatenergy is an energy-cum-infant formula company that acquired part of the Golden Koala brand recently. While Golden Koala could potentially have a bright future, I’m not overly convinced that it has the brand power to compete against the bigger players in a fiercely competitive market.

Wattle Health Australia Ltd(ASX: WHA)

Like Bubs, Wattle Health has signed numerous distribution agreements in Australia and Asia which give it a foot in the door. However, sales of its infant formula products have been thoroughly underwhelming over the last 12 months. This could be a sign that the products simply aren’t resonating with consumers as many had hoped.

More reading

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.