Should I snap up Fortescue shares while they’re around $20?

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computerA woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer

Shares in Fortescue Metals Group Limited (ASX: FMG) have tumbled 5% over two trading days to trade slightly over the $20 mark, likely leaving many considering buying the dip.

The iron ore giant posted its quarterly update on Monday, as The Motley Fool Australia reported. That saw the market bid its share price 4.15% lower.

And it appears to be backing up that fall today. Right now, shares in Fortescue are down 1.18%, trading at $20.515.

So, has the recent slump put the stock in the buy zone? Let’s take a look.

Fortescue shares trading for around $20 apiece

At around $20, the Fortescue share price is trading close to its 2023 low. Though, it’s still higher than it has been in recent memory.

The stock is 4% above where it was this time last year and nearly 79% higher than it was three years ago. And it’s been a volatile road for investors. Fortescue shares soared 113% in 2020, plunged 18% in 2021, and recovered 7% in 2022.

The company behind the stock looks quite different today than it did in 2020. Fortescue is one of the ASX 200’s three iron ore majors, deriving most of its revenue from the steel-making ingredient. It also launched its hydrogen-focused renewable energy leg, Fortescue Future Industries (FFI) in 2021.

What might influence Fortescue shares in the near future?

The majority of Fortescue’s revenue is tied to the iron ore price. Thus, the material’s value has a significant influence on its share price.

It’s unfortunate, then, that the commodity has been struggling over the last month.

And while brokers’ opinions on where it could go from here are mixed, Citi thinks there might be more pain to come. The broker is said to have tipped the iron ore price to fall to as low as US$90 a tonne this year – 11% lower than current levels, my Fool colleague Bernd reports.

However, it’s also worth noting Fortescue is bolstering its production through its Iron Bridge project. The project is expected to produce 22 million tonnes of high-grade iron ore annually.

The pros and cons of FFI

Now to the company’s green energy division. In my opinion, FFI brings both mountains of potential and some serious risks.

I believe the green energy transition could be a maker or breaker of companies, and Fortescue may have positioned itself to be a leader in the space. However, investors hoping to see a profit from FFI could be in for a long wait.

In the meantime, FFI can demand up to 10% of Fortescue’s net profit after tax (NPAT). Not to mention, the ASX 200 company has revealed a $9 billion plan to decarbonise its Pilbara operations.

All that spending has the potential to cut into shareholders’ dividends in the coming years.

If I had $1,000 to invest…

I personally don’t think Fortescue shares are a buy right now due to the steep risk-to-reward ratio on the table. If I had $1,000 to invest I’d probably steer clear of the iron ore icon.

And I’m not alone. Goldman Sachs has a sell rating and a $15.80 price target on Fortescue shares – representing a potential 23% downside.

Meanwhile, the slightly more bullish CLSA is said to tip the stock to trade 1.5% lower at $20, slapping it with a reduce rating, as per The Australian.

The post Should I snap up Fortescue shares while they’re around $20? appeared first on The Motley Fool Australia.

Should you invest $1,000 in Fortescue Metals Group Limited right now?

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More reading

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

from The Motley Fool Australia

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