News

WHAT ARE WE LOOKING FOR?

The S&P 500 is up about 55 per cent from the March lows and the stock selection strategy employed by the team at O'Shaughnessy Asset Management LLC, which manages $5-billion (U.S.), is being tested under extreme circumstances.

The “growth” funds have lagged the market, but the “value” strategies have excelled, said William Latimer, managing director, research director and portfolio manager with the group.

This week we have been running a series of screens using a stock selection system to find undervalued companies that is employed by James O'Shaughnessy and his asset management company, which, among other funds, manages the RBC O'Shaughnessy family of mutual funds.

Today's screen, the last in the series, 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.

MORE ABOUT TODAY'S SCREEN

The selected stocks chosen today 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 months and six months must have been above average for all U.S. stocks in the database.

The stocks that fit all of those criteria are then ranked according to their price change over the past 12 months.

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

WHAT WE FOUND?

Stocks have soared during the past year, but there's still upside, said Chris Meredith, managing director and senior portfolio manager with responsibility for investment strategy research at O'Shaughnessy Asset Management. The beaten up stocks lost 80 per cent of the value and the worst performing decile, or one-tenth, of the group were priced as if they were going to go out of business. As Mr. Meredith puts it, “They were priced for extinction.”

Research indicates the share prices of the bottom tenth have more than tripled on average, but because of the severity of the decline the share prices are still down 40 per cent from their levels before the stock market plunge, despite their sales and cash flow being down on average only 7.7 per cent and 11.7 per cent, respectively.

“The momentum continues to add value even after the extreme runup,” Mr. Meredith said.