3 reasons it’s time to abandon ship on Fortescue Metals Group Limited

When will the pain end for shareholders of Fortescue Metals Group Limited (ASX: FMG)? While the stock started trading yesterday down 22% since the start of the year, it fell a further 21c or 4.63% for the day to be trading at just $4.33 per share.

That’s a total drop of 25.6%!

That’s gotta hurt – particularly considering the stock was expected to be one of the top bets for new money in 2014! In the same time as the stock has plunged, the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has edged forward 1.5%.

Here are three reasons the stock has trended downwards recently…

  1. Morgan Stanley yesterday cut its rating of Fortescue from Overweight to Underweight – nothing makes investors run more than when a major brokerage firm downgrades its forecasts! Morgan Stanley is just one of the many analysts to become bearish on iron ore stocks over the last five or so months…
  2. The iron ore price is sitting just above US$93 per tonne. That’s an alarming 30% below its average US$135 per tonne price tag upheld through 2013! This will have investors treading with caution considering Fortescue maintains a significantly higher breakeven price than larger rivals BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).
  3. Unfortunately, it is likely the news will only get worse for investors in the iron ore sector – some investors are likely trying to limit their losses! Supply growth of the commodity continues to heavily outpace the demand growth from China. This is pushing iron ore’s price downwards. It is expected to plunge as low as US$80 a tonne over the coming 12 months!

A better bet than Fortescue…

Despite the stock’s enormous fall in recent months, I still don’t see Fortescue as an attractive investment opportunity with the stock being totally at the mercy of the plunging iron ore price.

A stock I am much more bullish on (and already own) is also one the Motley Fool's top analysts have tapped as their number one stock pick for 2014 and beyond. This small-cap growth stock flies under the radar, yet is rapidly growing, and has a long runway ahead. The fully franked dividend is the icing on the cake. Click here now to claim your FREE copy of "The Motley Fool's Top Stock for 2014." I own the stock, and think you should too.

Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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