It has been an unpredictable few weeks on the stock market. Some shares have seen incredible swings. An example is the metal producer Evraz (LSE: EVR). The Evraz share price is up 20% so far today as I write this, but it has still fallen 85% so far in 2022, and the same amount over the past 12 months.
I think the dramatic movements in Evraz shares recently contain lessons for all investors. Here are two I am applying to my own investing approach.
Yield traps as warning signals
Right now, Evraz theoretically has a 114% dividend yield! In other words, I could more than get my money back in dividends alone within a year, by buying at the current Evraz share price.
In reality, what will happen is anyone’s guess. The company is still due to pay a 50c (roughly 38p) interim dividend this month. The record date is 11 March, which means that if I bought Evraz today then I would be in line for the dividend — if it ends up being paid. It could yet be cancelled and I see that as a real risk.
With a 114% yield on paper, the company currently looks like a classic yield trap to me. A yield trap is a share with a seemingly mouth-watering yield, which in reality could fall in future as it reflects heightened risk.
The lesson I draw here is always to pay attention when a share looks like it could be a yield trap, even on a less dramatic scale. Under a month ago, when Evraz yielded an unusually high 26%, I concluded that “I had decided not to buy it for my portfolio, as it looked too risky for me.” Since then, the Evraz share price has collapsed 70%.
Political risk is very hard to price
Some of the movements in the Evraz share price recently – and arguably for most of its life so far as a listed company – reflect different investors’ assessments of what are known as political risks that might affect the company.
Such political risks include assets being seized, foreign exchange controls being imposed and contracts being legally voided. Such political risk is far more common than many investors may realise. It is especially common for natural resources companies that do business in countries often with a weaker rule of law than the UK. For example, a long-established company like Antofagasta could see revenues and profits fall if a new Chilean government nationalises mines.
The Evraz share price and political risks
Evraz has always faced sizeable political risk due its areas of operation. In fact, I think its experience of dealing with them could mean the recent share price fall is overdone – but I do not know. As it pointed out in its latest annual report, “Russia is considered to be a developing market with higher economic and political risks.” But there are such risks in its other large markets of Canada and the US too.
Political risk is very complicated to assess in advance, even for professional investors. I think most private investors lack the insight or tools to assess it accurately. So if a company faces unusually high risks like this, that will already often place it outside what I regard as my circle of competence as an investor. On that basis alone, I would not invest.
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Christopher Ruane 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.
