Should You Buy Fortescue Metals Group Shares at This Price?

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.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor

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