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WHAT WE ARE LOOKING FOR?

This week we have been running a series of screens to find undervalued stocks developed by best-selling author James O'Shaughnessy, a quantitative analyst.

Mr. O'Shaughnessy is the author of What Works on Wall Street and his firm O'Shaughnessy Asset Management LLC oversees the RBC O'Shaughnessy family of mutual funds. It has about $5-billion (U.S.) in assets under management.

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Today, we add some complexity to the "cornerstone growth strategy," which begins with the price-to-sales ratio (PSR) and then looks at other factors such as earnings. Mr. O'Shaughnessy calls the PSR the "king of value factors" in his stock selection systems because it is the most consistent and strongest indicator of an undervalued stock.

This week we have presented the lowest PSR for both Canadian and U.S. common shares. The PSR is calculated by dividing the stock price by the annual revenue per share.

Although there are some differences in the PSR between industries, by employing both growth and value strategies, those differences average out over time, said Chris Meredith, research director and portfolio manager for O'Shaughnessy Asset Management.

Using the PSR base, we will add several more criteria. The stocks must have a PSR of less than 1.5; they must show positive earnings growth over the past year; and the change in their stock price over the past three and six months must have been above average. The stocks that fit all those criteria are then ranked according to their price change over the past 12 months.

Today we look at Canadian securities and tomorrow we will use the screen on U.S. companies.

MORE ABOUT TODAY'S SCREEN

The database consists of all Canadian securities covered by Compustat North America. For purpose 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 value is less than $200-million. Also excluded are all investment trusts, mutual funds and limited partnerships as well as securities that appear in both the Canadian and U.S. industrial files of the Compustat data base.

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WHAT WE FOUND

The Canadian companies making the list are a diverse assortment some of which support high yields. Those include Data Group Income Fund, Extendicare REIT, Chemtrade Logistics and Student Transportation.

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