At current levels the top end of town is looking overpriced, and compared to this time a year ago the entire S&P/ASX 200 (ASX: XJO) (Index: ^AXJO) is looking more expensive.

Up until recently, one group of stocks that had fallen from grace are iron ore plays such as Atlas Iron (ASX: AGO), Fortescue (ASX: FMG) and, to some extent, Rio Tinto (ASX: RIO) and BHP (ASX: RIO). Now, a resilience in iron ore prices has got some bulls thinking that the recent upwards trend can continue.

chart
Source: Google finance

A few months ago, I said that pure play iron ore stocks should be avoided. Despite the strong gains in the past three months, I stand by my contention because nothing has made me change my mind.

The dangers of a volatile commodity price is still lingering, slowing Chinese demand is apparent and many believe a huge iron ore glut awaits the market. Today the Sydney Morning Herald reported that BlackRock, one of the world’s biggest mining investors, sold nearly of $60 million of Australian and Brazilian iron ore stocks – perhaps a sign of their expectations in the stock prices or commodity itself.

Earlier this year, Goldman Sachs predicted a huge oversupply of the steel making ingredient in coming years would result in a price around $80 per tonne whilst Macquarie was slightly more bullish at $88 per tonne. Either way, the reduced price will put pressure on iron ore stocks, including our largest players like Rio and BHP, for whom iron ore remains one of their most lucrative products.

Foolish takeaway

Taking a short position on iron ore stocks might be a smart way to take advantage of the perceived overvaluation of our miners but like any type of investing you’ve got to consider your tolerance for risk. This Fool isn’t buying or shorting iron ore stocks but instead looking for great yielding shares that are cheap and can be held for 5 or 10 years.

One such stock is The Motley Fool’s favourite income idea for 2013-2014. Check out our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.   

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