Value hasn’t exactly been the most favoured area of the market for many investors recently, due to a combination of both high costs, macroeconomic headwinds and precarious balance sheets acting as a deterrent.
In fact, FE Alpha Manager Alastair Mundy, who is head of Investec’s value team, described markets as being in the throes of “value hell” at the start of the month and attributed the underperformance of his Temple Bar Investment Trust to the fact there are too many headwinds and too few attractively-valued stocks at the moment.
The divergence between value, growth and quality stocks has become more pronounced over the last year in particular, with the MSCI United Kingdom Value index underperforming Growth and Quality indices by 17.69 and 13.48 percentage points respectively.
Performance of indices over 1yr
Source: FE Analytics
However, Paul Mumford (pictured), who runs the £129m Cavendish Opportunities fund, says that the recent increasing number of profit warnings has actually opened up market opportunities, despite the fact it is deterring many investors from turning to value. 
As such, Mumford tells FE Trustnet about the five value areas of the market that look the most interesting at the moment, and why investors should be taking a close look at them.
Oil & Gas
It’s common knowledge that the oil & gas sector has fared badly over the last year, as a result of over-production and the subsequent plummet in prices.
Mumford though says that the sector is so oversold that there are inevitably value opportunities there, which should come to fruition over the next few years.
“I think it’s as oversold now as when people overbought when it was up at $140 per barrel,” he said.
“It’s obviously not for the faint-hearted, but I think there are certain companies in the sector which will survive in any case and other companies that will get taken over.”
One stock that Mumford has held for a while is Faroe, which is an AIM-listed oil and gas company focusing on exploration and production opportunities in both Norway and in the UK.
Last week, the company announced it has secured a rig to drill the Brasse prospect on the Norwegian Sea next summer.
“One of the big plus sides is that because the oil price has fallen, drilling costs have collapsed as well,” Mumford explained.
“Consequently a company like Faroe, which has net cash on the balance sheet, its current development programme is paid for, it’s got good production and has low production costs, is going to survive. And if it finds a significant discovery then so much the better.”
Mining
Mining stocks have similarly bombed over the last year as a result of the lack of demand for commodities, which was triggered by a combination of over-production and the growth slowdown in China.
“It’s very difficult to predict when metal prices will recover but I think that when things start to look a bit better that’s bound to happen,” Mumford said.
“As with the oil and gas sector there are very highly-geared companies that I would definitely avoid, but if one goes to the soundly-based companies then there are good opportunities.”
An example of one of these companies that the manager holds is Antofagasta, a Chilean copper mining group listed on the London Stock Exchange.
While it has significantly underperformed the FTSE 100 over the last year with its loss of 41.73 per cent, it has made a smaller loss than the FTSE 350 mining index which has produced a negative return of 47.18 per cent over the same time frame.
Performance of stock vs indices over 1yr
Source: FE Analytics
“It’s a survivor that will do reasonably well. Maybe you won’t get the same sort of recovery that you would get from the highly-respected companies, but nevertheless it’s a good opportunity to pick up stocks like this at a reasonable sort of level,” Mumford added.
Food retailers
Food retailers have bombed this year as a result of ongoing price wars squeezing company’s profit margins. However, Mumford says that supermarkets are likely to have a far more lucrative Christmas than people are predicting.
“I think margins will start to look at little bit better as there has been slightly less discounting than there has been in the past, but having said that, the big problem looming into 2016 is the introduction of the Living Wage which will have quite a big effect on these further profit warnings as we move into the New Year,” he said.
“It’s a question of how well they cope with it. That said, I think that you always find that good comes out of these situations. Companies use the opportunity to look at themselves, to get rid of poor-performing outlets and to rein back on excessive plans.”
One food retail play in Mumford’s portfolio is McColl’s, a British newsagent operator and convenience store which was floated on the London Stock Exchange last year.
Unlike larger supermarkets, the manager points out that the company is able to acquire further outlets and can increase its footfall by converting some branches into wine and fresh food sellers.
Another advantage the company has been capitalising on, he says, is adding an in-house post office to stores.
“With the growth of ‘click and collect’, customers are still quite often using post offices because it’s much more convenient than having items delivered to their home,” Mumford explained.
Aerospace and defence
While there have been success stories in the sector as a result of increasing consumer demand and cheaper flight prices due to falling oil costs, Mumford says there are still individual unloved stocks in the sector.
One such company is Rolls Royce, which has announced five profit warnings in less than two years. New CEO Warren East was appointed in April, and as a part of a cost-cutting drive the firm announced a further major management restructuring last week.
Performance of stock vs index over 2yrs
Source: FE Analytics
“Every investor under the sun has fallen out of love with Rolls Royce, but I think the company will benefit from management changes,” Mumford continued.
“The share price has seen a big over-reaction. I’m taking a five-year view, and I think that’s a good value play.”
Consumer discretionary
Similarly to the aforementioned sector, Mumford says there are still value stocks to be had in areas of the market that have performed well.
He adds that a number of clothing retailers look particularly attractive at the moment, as a result of a mild bout of weather which has left them over-stocked with warm winter clothing and has squeezed margins.
“We had a profit warning from Bon Marche [on Thursday] and the share price fell quite considerably,” he said. “When you get a profit warning, you tend to get a reaction. If you buy on day two of the warning it’s quite often better than buying on day one, so it initially got knocked back from £3 to £2.25, and I paid under £2 just now [Thursday] for shares.”
Mumford adds that Bon Marche has re-designed its stores recently and has shifted its focus to consumers over the age of 50, which means it can capitalise on a growing area of the market.
“The big disappointment is that the CEO has been headhunted and has gone to Karen Millen and she was very good. It’s still a good opportunity to pick up stocks and, in the coming weeks, I’m going to look at other companies in the retail sector that have suffered in similar ways shares get knocked back too much,” he explained.
“The answer is not to go overboard on these stocks, but when they do recover they do so pretty well. There will be casualties along the way, no doubt about it, hence the reason why I always hold a wide spread of interests.”
Over the last five years, Cavendish Opportunities has returned 69.67 per cent, outperforming its peer average in the IA UK All Companies sector by 29.07 percentage points but underperforming its FTSE Small Cap benchmark by 14.25 percentage points. The fund has a clean ongoing charges figure of 0.81 per cent.
