Should You Buy Fortescue Metals Group Ltd at This Share Price?

What happened to the FMG share price?

Despite the incredible gains Fortescue Metals Group Ltd [ASX:FMG] was able to produce on Monday (and the week before that), the stock has given back those gains over the course of this week. Right now, the stock is down from where it started on Monday. So how should investors position themselves in a stock like FMG?

Why did FMG shares do this?

We saw an incredible rally in energies and iron ore prices earlier in the week. The Aussie dollar also picked up some meaningful gains during the commodities rally.

FMG is an ‘exciting’ stock. What do I mean by that?

FMG is a mid cap stock. It has historically been a stock that provides investors with huge gains…as well as large losses. That’s what makes it ‘exciting’.

Timing and agility is important when trading this stock. This is especially true for short term investors. However, the stock exhibits trend behaviour that has been responsible for some of its large gains over time. This means a certain degree of inference can aid our investment in stocks such as FMG. These stocks are closely tied to the commodity prices.

FMG has generally been a loser during the last few years of commodity bear market. You were much better off shorting the stock. However, the tide is slowly turning for commodity stocks. It is obvious that commodity prices aren’t likely to fall infinitely and forever. At some point, they have to turnaround. Is that time now? I can’t be certain, but I can tell you that FMG tends to generate more impressive gains during recoveries and commodity bull markets.

What now for FMG?

After the mediocre performance this week, I am not sure if FMG is still a stayer for short term traders (long positions). However, that won’t stop long term investors from taking a bet on a recovery case for commodities.

Fundamentals are still weak, that is true, but stocks have also been oversold. What this means is this may be a good opportunity for long term investors to get in.

Ken Wangdong

Emerging Market Analyst, New Frontier Investor

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