Selecting winners by focusing on sales

what are we looking at?

Stick with a healthy level of stocks in an investment portfolio, says quantitative equity analyst James O'Shaughnessy, author of the bestseller investment guide, What Works on Wall Street.

"The flight from equities is pervasive - our salespeople are hearing time and again that financial advisers are decreasing their allocations to stocks - to as low as 5 per cent," he said in a report to clients.

Investors in the United States are piling into government bonds as they try to rebuild their balance sheets, while staying away from what they view as the risky stock market.

"I believe that all of these changes to asset allocation are coming at exactly the wrong time and that investors who follow the herd-like move to overweight stocks will be bitterly disappointed over the next 10 years," Mr. O'Shaughnessy said.

Take a long-term view, he said. The classic portfolio consisting of 60 per cent equities and 40 per cent bonds has generated an average annual gain of 12.84 per cent in the 10 years following all recessions since 1926, compared with 6.4 per cent for a portfolio with 15 per cent in stocks and 85 per cent in bonds.

today's screen

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 average 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 firms with a share price of less than $1 (U.S.) and a market value of less than $200-million.

what we found

The number of companies posting a very low PSR (i.e. below 0.3) was 29. The widely diversified group include some of Canada's leading industrials and food distributors.

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