With the UK stock market trading close to a record high, many investors may feel there are unlikely be bargains anywhere in the index. While this may be true in some cases, with investor sentiment pushing some stocks to new highs, the reality is that some shares continue to offer wide margins of safety for new investors.
One example is Hurricane Energy (LSE: HUR). The oil and gas explorer is set to commence first production next year and investors may not yet have priced in its future potential. However, it’s not the only smaller company that could be worthy of a closer look. Reporting on Tuesday was a business which seems to offer growth at a very reasonable price.
The last year has been a hugely positive period for oil and gas companies. Investor sentiment had been weak for a number of years, with a low oil price causing profitability across the industry to come under pressure. Projects were mothballed and capital expenditure was cut as operators across the industry sought to improve their financial standing. As a result, relatively small exploration companies operating in the sector experienced a difficult period.
Now though, a rising oil price has meant that oil and gas stocks are becoming more popular among investors. This partly helps to explain the share price rise of Hurricane Energy over the last year, with its stock price rising by 16%.
However, the outlook for the business is also improving. Plans to progress with its Lancaster Early Production System (EPS) are moving along, with first production expected to be achieved within the next 12 months. This is due to turn the company from being loss-making into a profitable entity. And since it trades on a forward price-to-earnings (P/E) ratio of around 15 for next year, it appears as though the stock market may not have factored in its full growth potential.
Certainly, there are risks ahead. The oil price could fall, while there could be delays to the delivery of its strategy. But with a wide margin of safety, it could also offer high rewards in the long run.
Of course, there are other stocks that offer improving financial outlooks at reasonable prices. One such company is cloud computing specialist Iomart (LSE: IOM), which reported positive full year results on Tuesday. Revenue increased by 9% to £97.7m, while adjusted profit before tax increased 7% to £24m.
The acquisitions made by the company during the year could provide it with further growth catalysts over the medium term. And with Iomart upbeat about its future potential to engage in further M&A activity, the company’s prospects appear to be positive.
With the stock expected to report a rise in its bottom line of 13% in the current financial year, its price-to-earnings growth (PEG) ratio of 1.7 appears to offer good value for money. The cloud computing space seems to have strong potential, with the company offering significant capital growth prospects over the long term. As such, it could be worth a closer look at the present time.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK owns shares of Iomart Group. 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.