Should You Buy Fortescue Shares at These Prices?

Fortescue Metals High Vis

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

Greg Canavan

Greg is the Managing Editor for Money Morning. He helps investors preserve their wealth over the long term using a method known as value investing. Lucky for Money Morning readers, he imparts some of this knowledge on them three times a week with editorial spots.

Greg Canavan is a feature Editor at the Money Morning and is the foremost authority for retail investors on value investing in Australia.

He is also the Editor of Crisis & Opportunity. An investment publication designed to help investors profit from companies and stocks that are undervalued on the market. Greg is the former head of Australasian Research for an Australian asset-management group and has appeared on CNBC, Sky Business’s ‘The Perrett Report’ and Lateline Business. He has written articles for The Sydney Morning HeraldThe Australian and Greg’s aim is to help you create a portfolio of stocks based on sound, proven, investing principles. His system for identifying stocks trading beneath their ‘intrinsic’ value combines a big picture understanding of the financial markets with a thorough valuation analysis of individual securities.

Greg’s method of investing is not about taking huge risks and rushing into big positions. He investigates highly profitable companies trading at a reduced premium to their net asset value, or ‘equity’ value as he puts it – and passes that research on to his subscribers to incorporate into their financial plan as they see fit.

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

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

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