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WHAT ARE WE LOOKING AT?

It has been a tough 10 years for investors, framed between the technology bubble in 2000 and the recent credit crisis.

They were among the worst bear markets for the S&P 500 in history, exceeded only by the 1929 crash and the stock market plunges of 1937 and 1973.

But it would be a bad strategy to run away from stocks and into bonds - which is what most investors are doing now - when equity markets are about to resume their long-term growth trajectory, according to research from O'Shaughnessy Asset Management (OSAM). The investment management company, with more than $5-billion (U.S.) under management, follows the tenets laid out by quantitative equity analyst James O'Shaughnessy, in his book What Works on Wall Street , an investment guide.

A study of 10 major bear markets since 1929 indicates that during the second year of the recovery, now under way, the best stock market performers are stocks with high book value-to-share price ratios, high dividend yields and strong recent momentum. That is opposite of what happens in the first year of a recovery, when the companies that look as if they are going out of business soar in price, outpacing their conservatively valued counterparts.

It is exactly that phenomenon which has led to significant underperformance of our growth strategies at OSAM, said Patrick O'Shaughnessy, a vice-president and portfolio manager with the group and son of James O'Shaughnessy.

TODAY'S SCREEN

This week we are taking a look at the time-tested stock selection system developed by James O'Shaughnessy. The system follows 100 separate factors, although far fewer play a role in the actual investment decisions.

The cornerstone of the system is to look for stocks with low price-to-sales ratios (PSR). Put simply, the system is designed to buy as many dollars in sales at the lowest possible cost.

Today we start with a screen of Canadian stocks showing the lowest price-to-sales ratios, which are calculated by taking the common share price and dividing it by the average annual revenue per share. Tomorrow we will do the same screen for U.S. companies, and then more complicated screens later in the week.

The database consists of all Canadian securities covered by Compustat North America, but excludes companies with a share price of less than $1 (U.S.) and a market value of less than $200-million.

OSAM manages the RBC O'Shaughnessy group of funds. During the past year, the RBC O'Shaughnessy Canadian equity fund is up 48 per cent with an average gain of 8.07 per cent over 10 years, compared with average returns for the Canadian equity group of 38.8 per cent and 4.52 per cent, respectively, according to Globeinvestor.com data.

WHAT WE FOUND

It is a highly varied list of companies trading at low PSR, including food processors, a buy-out firm, a retailer, and a forest products company.

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