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Revisiting the 'king of the value factors'

abarnes@globeandmail.com

WHAT ARE WE LOOKING FOR?

Stock picking at any time can be challenging. In these extraordinarily volatile markets, it is even more so. So this week, we are revisiting the time-tested stock selection system developed by stock market guru James O'Shaughnessy, author of the best-selling What Works on Wall Street and manager of the RBC O'Shaughnessy family of mutual funds.

The essence of his system, derived from a test of decades of data, is looking for stocks with low price-to-sales ratios (PSR). He considers the ratio "the king of value factors" and the strongest and most consistent indicator of an undervalued stock.

TODAY'S RESEARCH

Last May and then again in September, we screened Canadian and U.S. stock markets using Mr. O'Shaughnessy's "Cornerstone Growth" screen, which starts with the price-to-sales ratio, but then branches out to include profit growth and price momentum measures. But first things first; today we start with a screen of Canadian stocks showing the lowest PSRs, which you calculate by simply taking the stock price and dividing it by the annual revenue per share.

Tomorrow we will do the same for U.S. stocks and then we will move on to more complicated screens later in the week.

Today, to narrow the field somewhat, we've examined only common shares that trade above $1 a share and have market capitalizations of at least $200-million. Investment trusts, mutual funds and limited partnerships have been excluded. To be included, stocks must have a median trading value over the past 20 days of at least $250,000 a day.

WHAT WE FOUND

This time around, the PSRs are considerably lower than they were in May, when a number of the selected stocks sported PSRs of one or more. The September PSRs were, like those of the latest crop of candidates, all well below one. There was an increased number this time with very low ratios, i.e. below 0.3.

Price-to-sales - Canada

$$$%Revenue $-mil Price
Price52-wk52-wkDiv. Most rec.LastMost rec.toTotal return %
SymbolCompany nameRankMar. 28high low yld fisc. yr end12 moquartersales1-mo YTD1-yr
BCB-TCott Corp.13.4419.701.740.02,0621,8614070.1338.7-47.5-77.5
CRW.UN-TCinram Int'l Incm 25.7430.004.900.02,2582,0816870.16-4.70.0-67.5
OCX-TOnex Corp. 329.5041.5028.440.423,43323,4335,9940.16-13.2-15.6-8.6
QBR.B-TQuebecor Inc. 425.4543.2525.330.89,8229,6212,2940.17-15.3-28.7-34.0
EMP.A-TEmpire Co. Ltd. 538.5057.1435.691.713,36713,8583,5030.180.8-9.7-2.5
CLS-TCelestica Inc.66.788.054.660.010,2548,4352,1820.180.417.1-2.9
WN-TGeorge Weston Ltd.746.8583.9043.433.132,16732,70110,1630.182.6-12.8-32.0
CAS-TCascades Inc.87.7113.056.962.13,3973,9299370.19-8.8-8.2-34.4
ACE.B-TACE Aviation Hold.920.9532.0519.780.010,82610,8262,5200.20-13.2-25.9-20.1
ATD.B-TAlim. Couche Tard1015.5224.7813.690.913,37814,5523,3230.22-7.2-15.0-35.6
TRZ.B-TTransat A.T. Inc. 1123.3042.3819.661.53,0463,0466800.26-16.2-33.2-32.1
MRU.A-TMetro Inc. 1224.1441.7821.002.110,64510,6362,5070.2610.1-7.9-33.1
MRE-TMartinrea Int'l137.6719.497.670.08721,8394760.27-16.9-37.2-42.1
NT-TNortel Networks 146.5028.695.840.010,80511,4343,1560.28-26.8-56.6-77.0
L-TLoblaw Cos. Ltd.1530.1555.0026.752.828,64029,3846,9670.284.3-10.6-32.7
CBF.UN-TConnors Bros. 165.7412.444.5513.91,0931,0332190.28-17.0-24.7-44.2
MG.A-TMagna Int'l1771.11102.0067.511.428,13827,3566,7470.29-6.0-10.9-17.0
NCX-TNova Chemicals1824.6643.7023.661.67,5867,0361,7720.29-20.9-23.3-30.7
KFS-TKingsway Fin.1911.5724.3710.202.62,2302,1315030.30-11.7-3.0-44.9
MFI-TMaple Leaf Foods2013.1016.9311.871.25,2105,2101,2740.321.1-11.5-5.8
RON-TRona inc.2113.7625.2613.000.04,5524,7851,0870.33-2.3-19.3-41.4
TIF.UN-TTransForce Incm 227.5315.356.0921.11,7951,9404940.33-0.5-14.2-34.2

SOURCE: O'SHAUGHNESSY ASSET MANAGEMENT

© 2007 The Globe and Mail. All rights reserved.

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