U.S. manufacturing continues to slow, with the ISM Index posting its lowest reading since May 2020 last week (50.9 versus 52.2 expected). This follows the underwhelming release last month by the regional Philadelphia Fed Manufacturing Index that fell back into contraction (Exhibit 1). Given the weakness in the Philadelphia Fed, which is highly correlated to the ISM, and the rising recession risks, we believe that the ISM falls into contraction (i.e. <50) in the coming months. Historically, when the ISM contracts, the more defensive consumer staples lead over discretionary (Exhibit 2). Also supporting our more defensive positioning is the recent inversion in the VIX futures curve into a backwardation. As we show in Exhibit 3, equities have come under pressure throughout the year in VIX crossovers at the front end of the curve into backwardation (Exhibit 3).
The increase of Jamieson raises our consumer staples portfolio weighting — a sector in which many names have moved up in ranking within our Quantitative Growth Model (QGM). With a current rank of 47 (out of 389), Jamieson ranks highly with its rising 12-month forward earnings (at all-time highs) and lower volatility. Jamieson’s 12-month forward earnings have increased to $1.82, which is 44.4% above when Jamieson reached its all-time share-price high in late-2020 (Exhibit 4). With Jamieson presently trading 21.5% below its 2020 peak, combined with its current all-time high in forward earnings, Jamieson’s 12- month forward P/E has declined to 18.7x from its 2020 high of 34.2x. Jamieson is also now trading at the low end of its historical range and 1.6 standard deviations below its long-term median P/E of 24.2x (Exhibit 5). Jamieson also benefits from the surging U.S. dollar, with approximately 25% of revenues from the U.S. and reporting in Canadian dollars. With Jamieson trading slightly above its more recent price support of $32, we are raising Jamieson to 4.0%.
Given our consumer discretionary sector view above, along with its weaker earnings momentum versus portfolio holdings Spin Master Corp. (TOY-T, portfolio weight 4.2%) and Pet Valu Holdings Ltd. (PET-T, portfolio weight 3.0%, Exhibit 6), we are lowering our consumer discretionary exposure with the removal of Roots.