With the FTSE 100 and small-cap stockmarket indices in the UK near all-time highs, it is becoming harder to find undervalued stocks.
However, there will tend to be sectors that investors are avoiding where a contrarian investor can take advantage of attractive buying opportunities.
One example could be the oil exploration sector. Oil prices have been under pressure early in 2013 and many smaller oil exploration and development-focused companies have seen their share prices fall back.
The sector has also been undermined in the past year by disappointing news on the exploration front, with few new discoveries announced by UK-listed companies. Technical and weather related issues have also led to delays in some development-focused companies bringing on new fields.
Taking a longer-term view, weakness in oil prices need not necessarily be a concern unless it is indicative of a structural change in the long-term price outlook. Equally while delays in bringing new fields on stream are frustrating, the long-term value implications may not be that significant.
We are keener on stocks whose share prices are largely underpinned by existing reserves, and where near-term exploration or appraisal activity is focused close to the existing finds, to reduce the inherent risks involved.
Peter Ewins is manager of the F&C Global Smaller Companies investment trust
