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Can the best performing ASX large cap in 2019 keep running higher?

Brendon Lau
Best ASX share

The best performing large cap of 2019 isn’t a tech darling but an “old school” stock. It’s iron ore miner Fortescue Metals Group Limited (ASX: FMG) and its share price closed at a more than 10-year high of $10.88 today.

This takes the FMG share price to a one-year gain of around 160% – making it the best performing large cap stock on the ASX.

The gain is even more impressive compared to popular high-flying tech stocks. The Afterpay Ltd (ASX: APT) share price rallied 124% while the Xero Limited (ASX: XRO) share price jumped 103% over the period.

Can Fortescue be king again in 2020?

The $11 billion (that’s the market cap of Fortescue) question facing investors is whether the miner continues to be a winning trade going into 2020.

There are a number of things that went in favour of the Andrew Forrest-founded iron ore producer this year. The narrowing of the discount paid for Fortescue’s lower quality ore and the higher-grade stuff shipped by BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) narrowed considerably. This gave Fortescue a much-needed boost to both its top and bottom lines.

But credit also needs to be given to management for running a tight ship and exercising discipline. Fortescue was quick to shower shareholders with fully franked dividends – the regular and special kinds.

Valuation issue

The bad news is that the stock is looking fully valued or overvalued on any metric. An encore is unlikely for 2020.

The fact that nearly two-thirds of brokers covering the stock only rate it a “hold” or “sell” is symptomatic of the valuation issue.

Paying for quality

On the other hand, stretched valuation is seldom enough to trigger a sell-off in the stock. If that was the case, the CSL Limited (ASX: CSL) and Commonwealth Bank of Australia (ASX: CBA) share prices would be pushed over a cliff by now.

Throw in the fact that Fortescue’s balance sheet gives it the flexibility to undertake another capital return in 2020, and you can see why some investors are reluctant to call it a day.

Foolish takeaway

However, as well run as Fortescue is under CEO Elizabeth Gaines, the so-called “third force” of the Pilbara is no CSL or CBA. Both of these stocks are at the top of their industries with real competitive advantages over their rivals.

Unfortunately, Fortescue continues to be the poorer cousin of the iron ore giants. This means a premium is not quite justified even though the outlook for iron ore improved with a likely US-China trade deal.

While the Fortescue share price may continue to hold the ground it captured in 2019, and may even advance, I think BHP and Rio Tinto have more scope outperform in 2020.

The post Can the best performing ASX large cap in 2019 keep running higher? appeared first on Motley Fool Australia.

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Brendon Lau owns shares of BHP Billiton Limited, Commonwealth Bank of Australia, and Rio Tinto Ltd. Connect with him on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO and CSL Ltd. The Motley Fool Australia owns shares of Xero. 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.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019