WHAT ARE WE LOOKING FOR?
Yes, the recent stock market performance has been abysmal, but it presents a once-in-a-generation opportunity, said quantitative equity analyst James O'Shaughnessy, author of a best-seller investing guide, What Works on Wall Street.
During the 40-year period ended February, 2009, the S&P 500 earned a real rate of return of 3.86 per cent, only the third such period since 1900 in which large U.S. stocks earned less than 4 per cent.
"We are talking about an event so rare, that most of us alive today will never see such an opportunity again," he told clients of O'Shaughnessy Asset Management LLC, which manages the RBC O'Shaughnessy family of mutual funds.
Over the subsequent 10 years after such an event, the S&P 500 gained an average 11.1 per cent, suggesting equity assets should more than double in price in about six years.
This week we are taking a look at a time-tested stock selection system developed by Mr. O'Shaughnessy. The system follows 100 separate factors, although far fewer play a role in the actual investment selections.
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 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.
WHAT WE FOUND<p> The number of companies posting a very low PSR (i.e. below 0.3) was 25, which is fewer than the 36 that made the list in October. Among the new additions were <web-entity>Parkland Income Fund <web-entity-symbol>PKI.UN-T</web-entity-symbol></web-entity>, <web-entity>Wajax Income Fund <web-entity-symbol>WJX.UN-T</web-entity-symbol></web-entity>, <web-entity>Russel Metals Inc. <web-entity-symbol>RUS-T</web-entity-symbol></web-entity>, <web-entity>Transcontinental Inc. <web-entity-symbol>TCL.A-T</web-entity-symbol></web-entity>, <web-entity>Power Corp. of Canada <web-entity-symbol>POW-T</web-entity-symbol></web-entity>, <web-entity>Gerdau AmeriSteel Corp. <web-entity-symbol>GNA-T</web-entity-symbol></web-entity> and <web-entity>Bombardier Inc. <web-entity-symbol>BBD.B-T</web-entity-symbol></web-entity> </p>