Why even 625% returns don’t convince me to invest in this FTSE 100 share

Manika Premsingh points out the risk factors for this investment.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The past year has been quite the roller-coaster for FTSE 100 steel producer and miner Evraz (LSE: EVR), which has seen a 20% drop in its share price on average in November compared to where it was a year ago. In the interim, the share price reached an all-time high before starting to drop pretty dramatically.

Great returns on capital

But for a long-term investor, EVR isn’t a share to take lightly.

Over the past five years, it’s seen a big 625% gain on capital. In fact, according to a report compiled by the Financial Times, it also gave the best returns in 2018 among all FTSE 100 shares, beaten only by online grocer Ocado. So now that the price is down to almost half of what it was a few months ago I think it’s a good time to figure out if this might just be a good time to invest in it and forget about it for the next few years.

Share sales and disappointing updates

First, why was there such a sharp drop in EVR’s share price?

The price started falling from its highs in July this year after its largest shareholder, chairman and CEO sold-off part of their holdings in the company. A 3.2% fall in revenues in the first-half of 2019 further dampened investors’ spirits in August, with a 9% fall in share price the day after the results were announced. The latest trading update has done little to reverse the share price direction. The sales of its three big product lines – steel, coal and vanadium – all showed at least some increase from the quarter before. However, the company’s outlook is a mixed bag for the next quarter, impacting sentiment.

Of dividends and cyclicality

For investors who are attracted to the promise of Evraz’s dividend yield of just below 16%, my colleague Jonathan Smith has made a case for why it’s something like an optical illusion right now, considering that the share price is falling. This also might explain why investors aren’t flocking to the share.

Further, mining and commodities is a cyclical business. It’s to be expected that during a downturn, its share price, as well as its results, will take a hit and the reverse is true during an upturn. We are by no means in a recession right now, but it’s a time of economic uncertainty, which isn’t doing the commodity sector any favours either.

The verdict

EVR is slightly cheaper than some of the other FTSE 100 miners like Anglo American and Rio Tinto in terms of the price-to-earnings ratio (P/E), but I’m not sure if it’s enough to swing the verdict in its favour yet. While the P/E for EVZ stands at 3.4 times, the other two are at 6.5 times and 5.3 times respectively. I’d wait for another trading and/or financial update from it before investing.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

A mixed ethnicity couple shopping for food in a supermarket
Investing Articles

4.24% yield and a P/E of just 12.1! Tesco shares look like a no-brainer buy for me

Harvey Jones thinks Tesco shares look good value after today's solid first-quarter results. He's now saving up to buy the…

Read more »

Market Movers

Why the Raspberry Pi share price is on everyone’s minds right now

Jon Smith reviews the 14% jump in the Raspberry Pi share price today as part of the successful IPO of…

Read more »

Rainbow foil balloon of the number two on pink background
Investing For Beginners

2 UK stocks that could do well out of the general election

Jon Smith runs the rule over two UK stocks that may benefit from higher spending on healthcare, consumer staples and…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Could this undervalued growth stock be the next big success story in US tech?

Shares of this US technology giant have collapsed almost 50% in 2024, but is the growth stock now an incredibly…

Read more »

Young black woman using a mobile phone in a transport facility
Investing Articles

After soaring 35% this year, is there still value in Barclays shares? Here’s what the charts say!

Barclays has been on a tear in 2024. But where does that leave investors considering buying some shares now? This…

Read more »

Light trails from traffic moving down The Mound in central Edinburgh, Scotland during December
Investing Articles

Nvidia stock has surged 3,450%. This UK investment trust owns loads!

Nvidia's recent amazing price surge has helped boost the value of this investment trust too as the chipmaker is its…

Read more »

Bronze bull and bear figurines
Investing Articles

After the general election what might happen to the FTSE 100?

Our writer’s been looking at the manifestos of the three main political parties to try and understand how the general…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

When will Shein hit the UK stock market and should I invest?

With Shein looking likely to list on the London stock market in 2024, this writer weighs up the case for…

Read more »