Fortescue Metals Group Limited (ASX: FMG) shares rocketed to a new record high on Wednesday. Shares in the Aussie iron ore miner closed 3.4% higher at $16.03 per share after reaching an all-time high of $16.10 in early trade.
There’s no doubt Fortescue has been a success story in 2020 and is strongly outperforming the S&P/ASX 200 Index (ASX: XJO) this year. But as with all ASX gainers, the question is how long the growth can last.
Let’s see what’s driving the Fortescue share price to new highs and whether or not it’s still in the buy zone.
Why the Fortescue share price is rocketing
One big factor behind Fortescue’s recent gains is a strong iron ore price recovery. The key commodity price hit a new 12-month high on Wednesday as China’s economic recovery continues to fuel demand for iron ore. There’s also ongoing supply disruptions from Brazil which is good news for Fortescue as one of the ‘Big Four’ iron ore miners around the world.
Strong commodity prices are clearly a good thing for Fortescue and its earnings. Investors have been piling into the Aussie iron ore miner this year, sparking a 48.7% share price gain. On top of that, a strong quarterly report in April has been an important factor. Fortescue reported record third-quarter iron ore shipments (42.3 million tonnes) and strong free cash flow. That led the Aussie miner to upgrade its FY20 shipments guidance to 175 to 177 million tonnes which has helped boost Fortescue’s value.
It’s interesting to note that while Fortescue shares are up 48.7% this year, rival iron ore shares are not. For instance, the BHP Group Ltd (ASX: BHP) share price is actually down 2.4% in 2020. It’s worth remembering that Fortescue is more of a pure iron ore miner while BHP has more diversified operations. For example, BHP has a number of segments including Petroleum, Copper, Iron Ore and Coal. That could be a big factor at the moment given some of the struggles in other commodity sectors.
Should you buy at an all-time high?
Normally, I’d be pretty wary of buying in to ASX shares at all-time highs. However, there are good signs for the Fortescue share price in 2020. The first one is obviously Chinese demand outperforming even bullish expectations. It also looks like supply disruptions could persist in Brazil, especially given the current impact of coronavirus on the country.
I also think governments could turn to infrastructure to kickstart their economies. That would further consolidate demand and push iron ore prices higher. On top of that, Fortescue’s price to earnings (P/E) ratio is still a lowly 6.9 despite strong recent gains.
If you’re after exposure to iron ore in 2020, I think Fortescue would be my pick ahead of BHP right now.
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Motley Fool contributor Ken Hall 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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