Well, fellas, you're going to love this one...
I set up the valve clearances and rotated the engine a couple of times to verify it. I was puzzled to see the exhaust valve opening slightly during the compression stroke. I put an indicator on it and the valve stem is being opened .050", which is 1.27 mm. In my experience, that's more than enough to lose compression. The valve begins to open just after bottom dead center and doesn't close until the piston is about 1 cm from top dead center. Of course, on the next cycle the exhaust valve opens it full stroke for the exhaust cycle.
I talked to the original owner when he gave it to me (free, thank God) and he said that it never really ran very well. I think I see why. I think this engine had a manufacturer's defect and the bottom side of the cam lobe wasn't ground properly. Short of replacing the camshaft, I don't think there's anything I can do to fix this.
I can't imagine that this would be a normal characteristic of the camshaft. Compression would be shot to hell on any engine that had a .050" deflection in the exhaust valve during the compression stroke, whether it's a lawnmower engine or a car engine.
