After plummeting more than 10% in value last week, Fortescue Metals Group Limited's (ASX: FMG) shares have today fallen further to be trading below $4.00 – the first time that has happened since August last year!
The stock fell as low as $3.93 in early trade, which is 13c below Friday's closing price.
It's certainly been a rollercoaster ride for shareholders over the last 12 months. Fortescue's shares have ranged between a low of $2.87 and a $6.22 high. Today's price resembles a 37% drop since that February peak.
The problem for shareholders is, I think there could be further to fall…
Iron ore is currently sitting just below US$91 per tonne after falling 3.8% in value last week. Although Fortescue will still make a profit at this price, its margins will be significantly lower than when the commodity was trading above US$130 a tonne throughout 2013.
Fortescue is currently trading on a projected P/E ratio of 3.45. Although this might scream 'bargain', investors also need to consider that the iron ore price could well have further to fall which could drag Fortescue even lower. Further, the miner's debt situation also needs to be kept in mind – as the commodity's price drops lower, the debt will become much harder to repay.
An even BETTER bet for your money
Even though BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are trading on higher multiples than Fortescue, they would be much safer bets given their greater levels of diversification. However, I don't think right now is the time to be buying iron ore stocks and would much prefer remain on the sidelines for the volatility facing the industry to subside.
