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Should you buy BHP?

From the beginning of July to mid-August, shares in BHP Billiton (ASX: BHP) soared over 20%, aided by much stronger-than-expected Chinese trade data and surging iron ore prices. However, the stock has fallen once again, leaving many investors wondering whether BHP is a good place to invest their money.

According to The Australian, whilst the stock was low at the beginning of July, the Relative Strength Index – which is a measure of momentum – was already trending higher, hinting that the company was in for a rally.

With the release of positive data from China, investors piled their money into the stock for fear of missing out on the rally, causing the share price to get significantly ahead of itself. Since the release of the company’s full-year results, however, that level has quickly been corrected with the stock falling 4.4% back to $35.75 per share.

According to Michael Gable – the managing director of Fairmont Equities – the company has further to fall and thus, investors should wait for a more attractive entry point, which Gable suggests will be around the $34 mark. Other investors, including Motley Fool General Manager Bruce Jackson, believe that a more attractive entry point would be below the $30 mark, taking into account the heavy volatility still facing the sector.

Foolish takeaway

For long-term investors, BHP and other major mining companies such as Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG) may be ones to avoid for now. Although they may rally over the space of a month or two (or more), the headwinds facing the sector make the miners risky prospects.

Until prices fall to more attractive levels, it may be worth looking elsewhere. For instance, are you interested in our #1 dividend-paying stock? Discover The Motley Fool’s favourite income idea for 2013-2014 in 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 Ryan Newman does not own shares in any of the companies mentioned in this article.

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