Amidst the chaos of the past two years, Aussie investors have seen a handful of trends come and go.
‘Buy now, pay later’ (BNPL) stocks are certainly one of the first sectors that come to mind. It’s a trend that went from boom to bust in the span of the pandemic volatility.
Likewise, lithium has emerged as one of the new popular trends to get involved in. And while we have certainly seen a lot of steam come out of the sector, it still has some momentum behind it.
But the one trend that has been largely forgotten is baby formula…
Back in 2018/19, before investors even knew what COVID was, baby formula was a highly prized commodity. Stocks like The a2 Milk Company [ASX:A2M], Bubs Australia [ASX:BUB], and Bellamy’s (before it was taken over) were the cream of the crop.
These kings of market had tapped into the huge Chinese ‘daigou’ market. Essentially, local buyers would snap up local stock and then ship it themselves to China for resale. This process was lucrative due to Chinese parents’ scepticism about the safety of local products.
However, that all changed when the pandemic finally set in…
Supply chain meltdown
As with many industries, COVID wreaked havoc on baby formula supply chains.
Getting products into China was already getting tough pre-pandemic with crackdowns on daigou channels and the trade war, but COVID lockdowns really sealed the deal. The baby formula trade, as lucrative as it had been, was basically dead.
And that’s the way things have remained for a while now.
There seems to be little hope about rekindling the opportunity in the huge Chinese market. That’s precisely why stocks like A2M and BUB have tanked pretty hard.
But, in a somewhat surprising turn of events, a new market has opened up…
The US is now in the midst of a major baby formula crisis.
The leading cause of this shortage is due to ongoing factory closures of key manufacturing facilities.
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Most notably, the Abbott plant in Michigan was closed earlier this year due to concerns over safety risks to infants. And while it was recently reopened after being cleared of any concerns, it has since had to close again due to flooding.
As a result, desperate parents are struggling to get a hold of the formula they need. And because of this, it has opened up a window of opportunity for Aussie producers, like Bubs, to fill the gap.
An underdog comeback
See, Bubs in particular has recently managed to secure a pretty meaningful win.
In cooperation for supplying US parents with their formula, the Biden administration has given them the greenlight for a permanent market presence in the US.
That is a huge deal for a market that has been so heavily concentrated for so long. Up until now, just two companies (Abbott and Reckitt Benckiser) have dominated the sector with an 80% market share. After all, the US has been strict about regulating such an important product for infants.
Now, though, with Bubs securing this agreement, they have a chance to carve out their own niche.
As FDA commissioner Robert Califf notes on the matter:
‘These flexibilities have been successful in helping to bring safe and nutritionally adequate infant formula products into the US marketplace on a temporary basis to address the formula shortage.
‘Given that success, the FDA has determined that a more streamlined pathway that leverages information we have received for the products for which we are temporarily exercising enforcement discretion would help provide for the long-term availability and marketing of many of them.’
For local manufacturers that have relied on Chinese demand for so long, this pivot from the FDA could be their saving grace. Like I said, Bubs is already paving the way on this front, but don’t be surprised if others try to follow in their footsteps.
Shareholders will no doubt be excited about this news, especially long-term holders.
But, for investors in general, this story should serve as a reminder as to how quickly trends can change.
All it takes is one breakthrough, or one slight opportunity, to revive a seemingly dead trade.
Regards,
 |
Ryan Clarkson-Ledward,
Editor, Money Morning
Ryan is also co-editor of Exponential Stock Investor, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.
