Potential trade idea: sell Fortescue Metals

I am reinstating my potential call for a short-term sell in FMG.

Source: Bloomberg

FMG has now broken through the January low and is currently at a six-year low, again falling below the magical $2.00 per share price point.

The price decline in iron ore remains in freefall and is moving into the abyss. Citi and UBS have further downgraded their iron ore forecasts to below US$68 a tonne by year-end; the rout in the commodity looks like it’s here to stay. Adding more pressure to the share price is the fact that there is no relief from China in sight;  steel mills continue to close on sluggish demand and stock piling remains elevated prices could remain under pressure for some time.

What is also detrimental to FMG is news that its recent debt refinancing has put it under the watch of the S&P, as its falling price coupled with concerns around repayments and elevated debt levels is seeing FMG under a major cloud.

The key stats:

12-month forward P/E estimate: 9.7x – current P/E 8.2x

Estimate earnings per share in FY15: US$0.26

Net debt: US$7.301 billion - debt to equity ratio: 93%

12-month high: $6.02 – 12-month low $1.89

Potential Trade:

With these variables in mind I would look to short strength to $2.10. I would potentially sell at current prices and look for a move all the way to $1.80 as FMG correlates with the falling iron ore price and a slowing China. I would look to put a stop loss at $2.20 to mitigate a possible pop in demand of iron ore. I see this as a very short-term trade and would place a limit at $1.70 as this will bring support and a likely rebound as fundamentals will be come to appealing.

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