What is Happening to the Fortescue Share Price?

What does FMG do?

Fortescue [ASX:FMG] is an iron ore producer, known as the ‘third force’ in the iron ore industry. That is, it is behind Rio Tinto and BHP Billiton in terms of iron ore output. In addition, its deposits aren’t as high quality as the two majors. That means FMG has a higher cost structure.

What’s happening to the Fortescue share price?

As you can see in the chart below, in recent weeks FMG has enjoyed a share price rally from a low of $1.45 to over $2. A recovery in the iron ore price is behind the rally, as well as a feeling that the worst is behind the sector.

FMG Share Price ASXU

Source: BigCharts

But the longer term share price trend is down, so it’s too early to say the worst is over. What’s more, you need to look at the reason for the iron ore recovery. China is on another debt binge, with credit growing at the fastest pace ever in January.

This is clearly unsustainable. That makes me think the iron ore price rebound won’t last either.

What now for FMG?

FMG’s share price has been falling for a long time. Every now and then, buyers come in and try to pick the bottom. But each time, the share price has continued to fall.

On the surface, FMG looks like a good stock to pick up on the cheap. After all, at the lows last year it was down around 80% from its peak.

But FMG is very sensitive to the iron ore price. If prices fall back into the US$30/tonne range, which is possible, FMG will hardly make any profit. And don’t forget its got big debts to service.

And given that the share price is still in a downtrend, I would remain cautious about buying in here. Buying into a downtrend is like swimming against the tide. The odds are not in your favour.

Combining the fundamentals and the charting picture, FMG looks like one to avoid for now.

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, Markets and Money

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you 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 Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. 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 same 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 Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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