The Motley Fool

Run away from OneSteel, and fast

OneSteel Limited (ASX: OST), Australia’s second-largest steelmaker, slashed its earnings forecast, sending its shares down 17 percent to an 11-year low.

In a statement to the ASX, OneSteel said it had revised down earnings expectations due to the recent collapse in iron ore prices (down 30 per cent in the last 3 weeks) and the strong Australian dollar.

The shares are now trading at less than $1, having peaked at around $7.70 in June 2008. Ouch.

We can’t say were surprised. In September, Motley Fool Investment Analyst Dean Morel told the story of how a couple he met had lost a bundle in the sharemarket after following share tips from friends and brokers.

Apparently this couple were surprised that a capital intensive company like OneSteel was not a good investment. Dean’s first tip was clear and simple: If a company’s return on capital is less than its cost of capital then run away…fast.

We hope they heeded his advice. With so many high quality companies trading on the ASX, why anyone would try to make a buck out of OneSteel is beyond us.

Look, we’re not suggesting you necessarily sell OneSteel now, but we certainly wouldn’t be piling into this dog. There are surely better options out there.

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