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WHAT ARE WE LOOKING FOR?

Stock prices have soared during the past year as they have climbed out of the depths, but the major indexes have a long way to go if they are to make up for what has been an abysmal 10 years.

This week we have been running a series of screens using a stock selection system employed by James O'Shaughnessy, a quantitative equity strategist and best-selling author of What Works on Wall Street .

His company, O'Shaughnessy Asset Management LLC, which manages the RBC O'Shaughnessy family of mutual funds, has backed-tested the system to 1960.

Today's is the last in the series and it looks at the U.S. common share market. The cornerstone of the process is to look for stocks with low price-to-sales ratios (PSR). Using that as a base, we build in recent stock market performance as a factor.

Mr. O'Shaughnessy calls PSR, which is calculated by simply dividing the stock price by the annual revenue per share, as the "king of value factors." The PSR is the most consistent and strongest indicator of an undervalued stock, he says.

MORE ABOUT TODAY'S SCREEN

Beginning with the PSR calculation, the selected stocks chosen today must have a PSR of less than 1.5. In addition, their profit must have grown over the past year and the change in their share price over three and six months must have been above average for all U.S. stocks in the data base. The stocks that fit all of those criteria are then ranked according to their price change over the past 12 months.

The database consists of all securities covered by Compustat North America. For the purposes of today's table, the companies must trade at a share price of more than $1 (U.S.) and they are excluded if the market capitalization is less than $200-million. Also excluded are all investment trusts, mutual funds and limited partnerships.

WHAT WE FOUND

The one-year returns of the companies making the list are stunning. Many were priced as if they were about to go out of business and went from being penny stocks to shares now worth several dollars.

The performance differences between the U.S. value stocks and growth stocks since the credit crisis have been stark. Data for the RBC O'Shaughnessy family of funds show that the U.S. value stocks soared 62.4 per cent during the past year, compared with a 27.25-per-cent rise in the index, according to Globeinvestor.com data.

However, the RBC O'Shaughnessy growth stocks have underperformed, rising 24.9 per cent during the past year, compared with a 35.8-per-cent increase in an index. Over a 10-year period the RBC O'Shaughnessy world of growth stocks, the index and the average performance of funds, were all down about 1 per cent.

The strong performance of the value stocks reflects the fact that during the stock market plunge ending in March, one-tenth of the stocks plunged 80 per cent, and those beaten down stocks showed up in "deep value" screens, said Chris Meredith, research director and portfolio manager for O'Shaughnessy Asset Management.

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