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.
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.
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Editor, The Daily Reckoning