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WHAT WE ARE LOOKING FOR?

Investors are betting against the odds in their flight to the safety of bonds and U.S. Treasuries after being beaten up by the stock market during the past decade, say researchers at O'Shaughnessy Asset Management (OSAM).

"This surge into fixed income comes at the end of a 25-year period where bonds have beaten stocks in the trailing one-, two, five-, 10-, 15-, 20- and 25-year periods," Patrick O'Shaughnessy, a vice-president and portfolio manager for OSAM, wrote in a report to clients. "Even a cursory glance at history would inform these investors that the worst time to invest in an asset class is when it has had such a long run of strong relative returns."

Equities are now the place to be, said Chris Meredith, senior portfolio manager and director of research for OSAM. "The yields on bonds are at historic lows and as interest rates rise, bond prices will fall," he said.

This week, we are running a series of screens developed by best-selling author James O'Shaughnessy, author of What Works on Wall Street and chairman and chief executive officer of OSAM, which has over $5-billion (U.S.) under management and manages the RBC O'Shaughnessy family of mutual funds.

The key factor in his stock-selection system is the price-to-sales ratio (PSR). He calls the PSR - which is calculated by dividing the stock price by the annual revenue per share - the "king of value factors" and says that a low PSR is the most consistent and strongest indicator of an undervalued stock.

Mr. O'Shaughnessy expects equities will be the asset of choice over the next three to five years and that momentum stocks should perform better than they have during the past year.

TODAY'S SCREEN

Today we turn to a screen of U.S. stocks showing the lowest PSR ratios, after looking at Canadian companies yesterday.

The database consists of all U.S. common shares covered by Compustat North America. All investment trusts, mutual funds and limited partnerships are excluded, as are shares trading under $1 and companies with a market value of less than $200-million.

WHAT WE FOUND

The U.S. retail sector - convenience stores and grocery stores - dominate the list.

Pantry Inc. is a convenience store operator in the southeastern United States and Cork-Mark Holding Co. distributes consumer packaged goods and store supplies to convenience store outlets.

Bon-Ton Stores Inc. sells moderately priced fashions to men, women and children. Nash Finch Inc. is a food wholesaler supplying products to independent supermarkets and military bases in the United States. It also operates supermarkets.

The quantitative screens are particularly good for analyzing market rotation into and out of individual sectors of the stock market, OSAM's Mr. Meredith said. The dominance of the retailers reflects the cyclical moves by the market, he said.

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