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Should you buy Fortescue shares on this week’s dip?

The escalating trade war between the US and Chinese governments weighed on Fortescue Metals Group Limited (ASX: FMG) share price today. The FMG share price fell 5.28%, to $7.17.

Today’s falls came despite positive results released by the company this morning. The company saw record earnings before interest, taxes, depreciation and amortization (EBITDA) of US$6 billion (AU$8.91 billion), up 90% on last year, and record net profit after tax (NPAT) of US$3.2 billion (AU$4.75 billion), 195% higher than a year ago. Shareholders will see a final dividend of AU$0.24 per share, bringing the full-year dividend to AU$1.14, 396% higher than last year.

Why did the FMG share price slump on such strong results?

It’s fair to say that Fortescue’s share price decline today, and in general since late July, comes down to one thing. The tit for tat war of tariffs between China and the US.

The two countries are Australia’s largest two trade partners, and China is the number one customer for Fortescue’s iron ore exports, so it isn’t hard to see why.

On Friday, President Donald Trump announced tariff hikes on almost all Chinese imports into the US. This came in response to China raising tariffs on US goods and imposing other fresh duties, earlier last week. These are only the latest two moves in an ongoing escalation, but markets reacted with shock. The Dow Jones fell 2.37% Friday, the S&P 500 2.59%, the Nasdaq 3%, and our own All Ordinaries was down 1.26% today.

Many experts believe the volatility may not end quickly. CMC Markets chief strategist Michael McCarthy said,

The economics of a trade dispute are very clear — a resolution would suit both sides. But it’s the politics of it and the ability of both presidents to appear strong to their own populations that means it’s likely to keep going.

That means we can still be talking about the trade disputes until the US presidential elections in November 2020.

So, is Fortescue a buy today?

Fortescue remains a fundamentally sound company, as its financial results show. The recent price falls, particularly today’s, have been caused by external events that management can’t control. In the short term, that’s obviously bad. There isn’t anything the company can do to stop US–China tensions from escalating. However, Forstescue isn’t some tiny small-cap miner, surviving on a knife edge. It’s unlikely to collapse in the face of short-term difficulties and should be well-positioned to recover when things change.

It could even benefit from growing market share as smaller rivals are less able to weather the storm.

We can’t predict when international trade tensions will ease. If you’re willing to withstand the volatility until things change, then these falls could be your chance to pick up shares in a healthy resources company like Fortescue Metals Group at a discount. Just keep in mind that shares could slip further before things turn around. Investors might consider averaging in gradually, rather than jumping in with both feet, when we can’t know how long the falls will last.

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Motley Fool contributor Tyler Jefferson has no position in any of the stocks mentioned. 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.

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