Talk about a vote of confidence from massive insider buying! The co-founder and chairman of Fortescue Metals Group Limited (ASX: FMG) just snapped up $15 million worth of his own stock.
The news sent Fortescue’s share price rallying higher in the morning before the stock started to drift lower to be 0.9% in the red at $4.08 in the last hour of trade.
To be fair, it isn’t the only iron ore miner to be giving ground in the afternoon. The Rio Tinto Limited (ASX: RIO) share price also gave up morning gains to trade 0.9% down at $77.32 while BHP Billiton Limited’s (ASX: BHP) share price also retreated from early gains to trade just under breakeven.
In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index has fallen 0.4% at the time of writing.
I am overweight on mining stocks, particularly these three shares, but Fortescue is a very recent addition to my portfolio.
The fact that Andrew Forrest is binging on shares in Fortescue like a politician does with entitlements is a very welcomed sign.
Buying when company directors are buying is one of the most effective investment strategies from my experience.
What’s more, Mr Forrest seldom does this even though he is consistently saying the stock is cheap. To be honest, I’ve yet to meet a CEO or chairman that doesn’t think his/her stock is cheap but it’s great to see Mr Forrest put his money where his mouth is.
The share buying spree by Mr Forrest is his first in two years and only the second in four years, according to the Australian Financial Review.
His holdings in the company have increased to 33.9% from 32.5% and the move comes only weeks after the miner announced a surprise $500 million share buyback.
While the stock may be giving ground this afternoon, I believe Fortescue has seen the last of its two-year low of $3.53 that it hit in September.
I’ve never really liked Fortescue until now. To me, the stock is a low-quality version of BHP and Rio Tinto, and it deserves to be trading at a big discount to its larger rivals.
However, the shrinking discount Chinese buyers are willing to pay for its inferior iron ore is a very positive sign in my view and the depressed valuation on the stock means the reward is well worth the risk.
Even the ugliest dog is entitled to have its day and I think Fortescue is well placed to outperform given that there’s little good news priced into its shares so far.
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Fortescue Metals Group Limited, and Rio Tinto Ltd. 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 Scott Phillips.