Should You Buy Fortescue Metals Shares Right Now?

What happened to the Fortescue Metals share price?

Hindsight’s a wonderful thing. If investors had to pick one stock at the start of the year that would outperform all others in the ASX 100, I doubt many would have picked Fortescue Metals Group [ASX:FMG].

Often touted as the ‘most shorted’ stock on the market, Fortescue hit a recent high of $6.20 — a far cry from the $1.50 it was trading for at the start of the year. In other words, a $5,000 investment in Fortescue in January would be worth over $21,000 today.

Why did Fortescue do this?

There were several reasons the ‘short’ Fortescue trade became so crowded. First, the bubble in iron ore prices burst, sending the share price of producers asunder. And unlike BHP [ASX:BHP] and Rio Tinto [ASX:RIO], Fortescue is a pure iron ore play. It lacks the diversity of its conglomerate rivals.

Another big issue was the size of Fortescue’s debt. However, rigorous attention to cost management enabled Fortescue to lower their cost base to match their long established competitors. Doing so enabled Fortescue to pay of chunks of its debt earlier than scheduled, taking some pressure of its balance sheet.

What now for Fortescue?

Despite the massive jump in Fortescue’s share price, it’s still only trading at around half the price of the peak of the market in 2008. After taking a huge amount out of production costs, further cuts will be harder to come by.

Because of this, it will be the spot price of iron ore that will have the biggest impact on the share price from here. After such a big run up this year, any turnaround in the iron ore price could see traders quickly take their profits in Fortescue off the table.

Matt Hibbard,
Money Morning

Money Morning Australia