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

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.

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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.