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Fund managers and brokers are becoming increasingly optimistic about Fortescue Metals Group (ASX:FMG), viewing the stock as a strong opportunity following its recent downturn. Analysts are now highlighting Fortescue's potential for recovery and growth, considering it a "bombed out" asset with significant upside potential.
Fund managers, including Chris Kourtis of Ellerston Capital, and various brokers are shifting their stance towards Fortescue Metals Group (ASX:FMG), despite the company’s challenges with falling iron ore prices. The iron ore giant has faced significant pressure this year, but recent analyses suggest that its beaten-down share price presents an attractive investment opportunity.
In the past two weeks, four prominent equity research firms—Citi, Morningstar, JPMorgan, and Morgans Financial—have upgraded their outlook on Fortescue, noting that the company's current share price makes it an appealing option for investors. These upgrades reflect a growing belief that the stock, which has been heavily discounted, may offer substantial upside potential.
Chris Kourtis, portfolio manager at Ellerston Capital, highlighted the shift in investment strategy by moving the fund’s holdings from BHP to Fortescue. Kourtis pointed out that Fortescue’s stock has declined more sharply than its peers, creating a potentially lucrative entry point at these "bombed-out" levels. This marks the first time Ellerston Capital has invested in Fortescue.
Fortescue’s stock has been historically undervalued compared to its peers, as evidenced by analysis from The Australian Financial Review and a JPMorgan report identifying it as the “most unloved” stock among Australian hedge funds. However, this sentiment appears to be changing, with three buy ratings now on Fortescue shares, signaling the most optimistic outlook from analysts in over 18 months. Morningstar has also upgraded its rating to hold.
Despite a 42% decline in Fortescue shares since the beginning of the year—outpacing declines seen in iron ore peers BHP and Rio Tinto—the company's valuation is now seen as historically cheap. Citi analysts, while acknowledging the issues with Fortescue’s 100% iron ore exposure, have given the stock a buy rating due to the significant valuation discount. This optimism comes amidst a backdrop of declining iron ore prices, which have fallen over 30% this year due to global growth slowdowns and reduced demand from China’s property sector. Additionally, Fortescue’s delayed green hydrogen project and ongoing legal issues have added to investor concerns.
