What happened to the FMG share price?
What happened?! Brexit happened… and then it went. Last Friday marked the beginning of a shock to financial markets. The market panicked. It didn’t like the vote in any shape or form. Prices dropped.
By Monday morning, I was advising investors to get into the trade at some point in the week. I myself was monitoring a long position in Fortescue Metals Group Limited [ASX:FMG]. By 12.38pm this afternoon, the stock was up by 2.57% from yesterday. Since last Friday, the stock has appreciated more than 10%.
Why did FMG shares do this?
Last week, I wrote about FMG being a strong momentum stock. It has so far continued to perform as a strong momentum stock despite all the commotions around Brexit. Why has FMG done this? Because it has paid down a lot of its debt, and there is a reflation in the price of iron ore.
Months ago, I wrote about the timing of commodity market reflation in the next 2–6 months. Now looking back, I can’t help but being a little embarrassed by what I wrote. I made a huge deal about how this would all blow over in the next 2–6 months. This would imply that bashed iron ore shares were all undervalued over the long run.
I was right about my prediction but the margin I offered (2 – 6 months) was too wide. It was highly likely the commodity market was going to bottom within such a wide period. And I failed to predict the stock market fall during the first quarter. I also left a lot of unknowns out of the equation such as the ongoing currency war and central banks.
But the message was there — buy undervalued commodity producers and hold for the long term. Fortescue was of course one to be kept in mind or on the portfolio.
What now for FMG?
Just yesterday, I wrote about how investors can trade the Brexit. I said it is a buy opportunity for those with quality assets. I said having quality asset is the most important step in forming a ‘buy low, sell high’ strategy, because only quality assets reflate after the worst is over.
Is FMG a quality asset? Yes, it is. However, I have a rather strict definition for FMG — a momentum stock. I would hold it for the short term and actively watch its performance. Just remember, momentum stocks such as FMG would run out of steam at some point, which is a time to perhaps take profit and buy back in after some adjustments.
Emerging Market Analyst, New Frontier Investor