You can’t escape the big market plunge with every sector losing ground following a sharp sell-off on Wall Street overnight.
Growth stocks trading at a premium are hit the hardest with the likes of WiseTech Global Ltd (ASX: WTC), Appen Ltd (ASX: APX) and Altium Limited (ASX: ALU) among the worst performers on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index this morning.
But don’t buy into the fear. The bull market isn’t dead although our market needed a big washout as several prominent stocks have run ahead of fundamentals.
When the market does rebound though, I suspect it will be underperforming value stocks that will be taking the lead as these stocks have lagged the market for a long time.
One of these underappreciated stocks may be iron ore producer Fortescue Metals Group Limited (ASX: FMG).
Its share price is a very rare green spot on the market as it gained 0.5% to $3.69 after it announced a $500 million share buyback and as JP Morgan pointed out that the market has “completely overlooked” a big improvement in its outlook over the past few months.
There’s plenty of space for Fortescue to play catch up too, given that it has crashed 26% over the past year when its larger rivals BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited Fully Paid Ord. Shrs (ASX: RIO) are up 27% and 12%, respectively.
“Since the lows of early July, Fortescue’s main products, Fortescue blend and super special fines, have risen more than 20%. Throughout this period, the share price has fallen 15%,” said JP Morgan.
“As it now stands, under a spot scenario, FY19 net profit is now some 50% higher than consensus.”
Fortescue’s ore contains less iron than its larger rivals and the discount between its ore and the higher quality commodity has blown out since the start of the year as Chinese buyers prefer the better quality product due to pollution controls.
It’s also a good time for Fortescue to be buying back its shares as critics often point out that companies tend to do that at the peak of their share price rally. No one can accuse the miner of making this mistake.
I have always shunned Fortescue even though I am overweight on mining stocks for this reason but I will admit that every dog has a price at which it starts to look more attractive.
Perhaps Fortescue is at that level although depending on how far BHP and Rio Tinto drops in this market shake-up, I’d probably still prefer to pay up for quality.
JP Morgan has an “overweight” recommendation on the stock with a price target of $5.40 a share.
The share buyback will run for 12 months and will start when the miner releases its quarterly production report on October 25.
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. The Motley Fool Australia owns shares of Altium, Appen Ltd, and WiseTech Global. 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 Scott Phillips.