Seeking out undervalued opportunities in the market often requires casting a very wide net. Sometimes however, drilling down into sectors of the market which have been heavily sold off can help narrow that search.
Three sectors which stand out for their potential to house undervalued stocks are the retail sector, the mining services sector and the IT services sector.
For many investors, despite the potential for value, the mining services sector is simply considered too risky with the very real possibility of a 'value trap' occurring.
Choosing to relegate this sector to the 'too hard' basket is understandable considering the possibility that mining services could continue to face headwinds for a number of years yet.
In contrast, the retail and IT sectors could offer better risk adjusted opportunities…
When it comes to investing in battered sectors, sometimes a 'basket' approach to diversify your portfolio can be the best way to go. Here are two stocks from both sectors that appear interesting for investors who are keen to seek out deep value oportnunities.
Myer Holdings Ltd (ASX: MYR) and Dick Smith Holdings Ltd (ASX: DSH) have both been lagging the broader S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) with their share prices down 46% and 1% respectively over the past year. Although the outlook for most retailers – Myer and Dick Smith included – remains uninspiring, arguably the headwinds are fully reflected in the current share prices.
Last week Data#3 Limited (ASX: DTL) soared around 30% after surprising investors with upbeat guidance for the recently completed 2015 financial year. With a market capitalisation of $152 million, Data#3 could be an indicator of a broader uptick for the IT services industry.
SMS Management & Technology Limited (ASX: SMX) and DWS Ltd (ASX: DWS) have suffered share price falls of 13% and 35% respectively. The cause of the underperformance can at least partly be blamed on the decline in general IT spending which has affected revenues and earnings across the sector. At some point businesses will have no choice but to increase spending to upgrade their technology which ultimately bodes well for the longer-term outlook for the sector and quite likely these two firms.
While the above companies may be quite well known, they are still quite small in terms of market capitalisation. Sometimes it is the smaller, less-well-known stocks which offer the greatest opportunities for profit.
