Should You Buy Fortescue Shares at These Prices?

What does Fortescue do?

Fortescue Metals [ASX:FMG] is a pure iron ore miner. It has mines in the Pilbara in Western Australia, and sells the majority of its production to China.

What’s happening to FMG’s share price?

In short, it keeps going up!

Iron ore prices just breached the US$100/tonne level. As a pure iron ore producer, this is great news for FMG. The company also carries a lot of debt, which means it’s highly leveraged to iron ore price moves. Not so good when iron ore is on the way down, but great when prices are rising, as they are now.

What now for Fortescue Metals Group?

With iron ore at US$100/tonne, FMG is making good money. FY2017 profit will show a big jump on 2016.

The share price has already factored this in. As you can see in the chart below, over the past 12 months, FMG has rallied from around $1.70 to $6.85 (today’s price). That’s a 300% gain!

Fortescue Metals Feb Share Price

Source: BigCharts

That means a lot of the good news has already been priced in. If you think that iron ore priced at US$100/tonne is here to stay, then FMG is still reasonable value, despite the share price surge.
But if you believe that prices have gone too far, and too fast, then you might be buying close to the peak here.

Having said that, it’s too early to call a top for FMG. Before becoming bearish, you really need to see the share price starting to make new lows. Specifically, a fall below $5.75 would suggest FMG’s epic run has finally come to an end. It would tell you the trend is in the process of turning down again.

But we’re not there yet. While I wouldn’t be a buyer here, if you own FMG, it’s worth holding on to the stock to see how this bull run unfolds.

Never assess a stock’s fundamentals without looking at the chart too. Combining fundamental analysis with charting can yield powerful results.

If you’d like to know more, click here.

Greg Canavan
Editor, Money Morning


Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Greg Canavan’s Investment Advisory.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

Official websites and financial e-letters Greg writes for:

Money Morning Australia