The Fortescue Metals Group Limited share price is getting smashed

Watch out below, the Fortescue Metals Group Limited (ASX:FMG) share price is down 24% in a month.

FMG share price

Source: Google Finance

As can be seen in the chart above, Fortescue’s share price has significantly underperformed the broader market, or S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), over the past month.

The catalyst behind the selloff is most likely the recent falls in iron ore prices, a steel-making ingredient which accounts for all of Fortescue’s profits.

In February, iron ore was fetching more than $US90 per tonne, much to the amazement of analysts and industry insiders.

In fact, in just 14 months, iron ore prices rallied more than 125% from less than $US40 per tonne in December 2015. In that time, Fortescue’s share price rallied 230%.

What now?

Now, the chickens could be coming home to roost with iron ore prices falling a further 4.6% to $US63.20 a tonne overnight, according to The Metal Bulletin.

However, it must be said that while a falling iron ore price is bad news for Fortescue, the company has relished the high iron ore price. It has used the extra cash flows to pay down debt, lower its cost base and boost its dividend to shareholders. That sums together to make Fortescue a stronger, more efficient business.

Indeed, although risks persist, the company is on a stronger footing to deal with the potential challenges presented by a persistently low iron ore price.

Buy, hold or sell Fortescue shares

In my opinion, Fortescue shares are a risky investment. While the company has — impressively — taken huge costs out of its business and strengthened its balance sheet I think its share price could come under more pressure in the near future.

Therefore, I’d rather invest in other, reliable dividend-paying ASX shares.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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