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Is it time for contrarian investors to buy iron ore stocks?

What: With the iron ore price sinking to a new 52-week low of US$95.70 a tonne overnight, many iron ore stocks including the $14 billion Fortescue Metals Group Limited (ASX: FMG) are also being dragged down. This scenario will have many investors asking how much further does the bulk commodity price and iron ore mining stocks have to fall?

So what: At some point value will most likely emerge in the sector and it wouldn’t be surprising if the sell-off takes the iron ore price and stocks well below fair value. One investor who thinks value is starting to emerge in the sector is Andrew Wells from fund manager Fidelity. According to a report in The Australian Financial Review, funds managed by Fidelity have been buying iron ore, coal and copper futures with Fidelity taking the view that US economic growth will be stronger than anticipated and dampen the impact from slower demand by China for commodities.

Now what: Since January the share prices of Fortescue, Atlas Iron Limited (ASX: AGO), Mount Gibson Iron Limited (ASX: MGX) and BC Iron Limited (ASX: BCI) have fallen 23.5%, 39%, 26% and 32% respectively. All four stocks are highly leveraged to the iron ore price and could rebound strongly if the iron ore price ultimately settles around the US$100 per tonne mark.

While in the near term some analysts are prediction iron ore could fall to US$85 per tonne, it’s the average price received by the miners which really counts making this sector one for contrarian investors to watch closely.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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