Fortescue Metals Group Limited up 7% in a week: Should you buy?

Is there more of a gain to come after Fortescue chairman Andrew Forest buys his company's stock in June?

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For a stock that was hitting lows of $3.91 just about a month ago when iron ore prices fell to near $90 a tonne, Fortescue Metals Group Limited (ASX: FMG) has rallied strongly to about $4.60. Just in the past week it is up 7% alone, while the S&P/ASX 200 Index (ASX: ^XJO) squeezed out only a 0.6% gain.

There's been a lot of concern that the heightened volumes of iron ore exports will keep prices depressed and cut deeply into small and mid-tier iron ore miners' margins. The big miners like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are the two lowest cost producers, so they can survive better on lower prices.

Fortescue has recently brought down its C1 production costs greatly since 2012 and with the company hitting its production target of 155 million tonnes of annual capacity, earnings are much higher. However, it had to take discounts on export prices due to lower iron ore grades. That worried the market, sending the stock down.

What can we take from this one-month rally?

Around the time the share price hit that $3.91 low, Fortescue chairman Andrew Forest stepped in and bought about $7 million in his company's shares, so he was a buyer at those levels. When directors and executives buy in significant volumes, investors should take notice.

However, that doesn't mean that they should buy themselves as well.

The stock could very well rise back up to $5 or even back to $6 where some bullish analysts have set a target. Despite that, where will it be several years from now? That's more the point that Foolish investors have to consider. It has been in a trading range for close to four years now and could move back down just as easily.

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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