Alibaba, Alphabet, and Amazon Stock Are Bargains, This Value Manager Says. Here’s Why.
Patient Capital’s Samantha McLemore says Facebook, Alphabet, and Amazon could benefit from a breakup.
Photograph by Stephen Voss
Samantha McLemore’s introduction to investing was as a teenager in the 1990s, when her father sought her input on whether to sell shares of Dell, a stock in which he had invested some of the settlement that McLemore received after a dog bit her when she was a child.
The money helped fund the now 41-year-old money manager’s education at Washington & Lee University, where she first met value-investing veteran Bill Miller, whom she has worked with for 20 years.
Last year, McLemore launched her own firm, Patient Capital Management, building on a separately managed account she began running in 2014 that she turned into the Patient hedge fund last July. McLemore’s new firm shares the same operating structure as Miller Value Partners, where she still co-manages the $2.9 billion Miller Opportunity Trust (ticker: LGOAX) with Miller. The fund has returned an average 24% a year over the past five years, beating 99% of its peers.
We talked with McLemore about the “buy what you know” type of Peter Lynch stocks her team is uncovering at Patient, the reason that Alibaba is one of her favorite stocks, and why she sees a bright future for fitness company SilverSneakers. Edited excerpts follow.
Barron’s: How is Patient Capital different from what you do at Miller Value?
Samantha McLemore: It’s more of an evolution. Patient is very similar in philosophy and practice. One thing motivating me is that I think it’s important to have female role models. We are starting to—with people like [ARK Invest’s] Cathie Wood—but we need more. That also flows into the portfolio. We have, for example, more companies with women CEOs, not because we have targeted that, but just that we have a different perspective and find opportunities in different areas.
What’s an example?
Take Farfetch [FTCH], Stitch Fix [SFIX], or RealReal [REAL]—all companies where part of the reason we found them is that our analyst is very interested in luxury, and she has used those sites. It’s classic Peter Lynch [Fidelity’s longtime Magellan fund manager]: What you use and see in the real world can represent investment opportunities. As we talked to men, there wasn’t that much understanding of these companies. That’s part of the benefit of the diversification of perspectives and life experiences that can lead to different ideas that go into the portfolio.
How do you think the pandemic will reshape consumer behavior?
The global financial crisis was traumatic for people, and had a direct impact in terms of making people risk- and volatility-phobic. Early in the pandemic, because cruise ships were the worst place for spread, the view was people will never cruise again. Recovery plays have been a big source of return, and we still see opportunity. There’s a ton of pent-up demand, so I see the potential for the analogy to the Roaring ’20s.
What are some of the beneficiaries?
We own Norwegian Cruise Line Holdings [NCLH], which has the balance sheet capacity to weather [this period]. We think there will be really good demand. Another is corporate travel and how impaired it will be. [Air carriers such as] Delta Air Lines [DAL] have improved their cost structure, so [the business-travel recovery] is a free call—and we know a certain amount will come back.
What do you make of the recent meme stocks and market behavior?
As John Templeton said: Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. Most of the past decade, we oscillated from pessimism to skepticism. We think we are more in the optimism [phase], with pockets of euphoria in higher-growth areas of the market.
Marginally higher inflation would [create pressure] for stocks that are expensive. We are just starting to see a reversal [in more speculative stocks], with more interest in value strategies. There’s a whole generation that hasn’t experienced value-led markets.
What is a classic value stock in your portfolio?
We bought DXC Technology [DXC], an information-technology services company, last spring. It hit almost $100 in 2018 and got down to $8 in 2020 amid internal operational challenges, with employees demoralized after a series of mergers and acquisitions, and external challenges with the shift to the cloud.
What attracted us was a new chief executive, Mike Salvino, who did an amazing job of growing and building a similar business at Accenture. His level of intensity is above and beyond anything I’ve witnessed. This is a people business, and he rebuilt talent, bringing in a lot of [people] who had worked with him before—always a good sign—and personally fixed customer relationships.
Now, he is going deeper into the organization, with calls on Saturdays with more-junior employees to get their perspectives. He has made a lot of progress, but there’s more. In a couple of years, we think DXC can earn $4 to $5 a share. The stock is still around $36. If it improves margins and sales trajectory, it could trade closer to peers with a midteens multiple or higher, implying a $75-plus stock.
Where else is the market overstating the disruption risk?
ADT [ADT] has an excellent management team and generates significant amounts of free cash flow. The market’s concern about newer security options has weighed on the stock. We disagree with the perceived risk. It’s trading at less than $10; we think it’s worth $16.
What’s the outlook for some of the growthier stocks in your portfolio?
As I think about growth, there are the more proven secular leaders, like [Google owner] Alphabet [GOOGL], Facebook [FB], Amazon.com [AMZN], and Alibaba Group Holding [BABA]. Given their valuation, growth, and cash generation—and their competitive advantages—you can hardly find better long-term values. Facebook, for example, trades at about 21 times next year’s earnings, and crushed revenue-growth expectations in the most recent quarter. People expect that to decline, but it should still grow [revenue] around 20%.
What about the regulatory risk for these internet behemoths?
What is the worst case? Breaking up these businesses, in a lot of cases, would be helpful to the stocks. That’s especially true for Amazon or Alphabet, where you could break off the cloud business or [Alphabet’s autonomous-driving subsidiary] Waymo, and those would trade for much higher valuations than when embedded in the whole. With Facebook, it’s tougher because it’s so connected to Instagram. But if you broke up WhatsApp, that could trade much higher than where it is valued. Even the worst-case risk is a benefit. The bigger risk is tax rates going up—but at these valuations, that is priced in.
Alibaba is facing intense regulatory scrutiny and has fallen 29% since November. What’s the attraction?
It’s one of my favorite names. Alibaba is trading at 21 times forward earnings, and growing even faster than other internet companies. The reasons for the decline include the regulatory and competitive pressures, which are well priced in. Regulators have moved on to other commerce players. I think it’s past the worst of it.
Are you concerned about their spending plans in areas where they don’t have an edge, such as bricks-and-mortar stores?
I’m not sure it’s the best call. But if you look at fiscal 2024, it’s trading at 11 or 12 times. I don’t think investing hurts their core earnings power, and if they succeed, they become more dominant and grow their total addressable market. I don’t think it’s a negative to try, as long as there is discipline to pull the plug if it’s not working.
What is a stock you own in Patient but not in Opportunity?
Opportunity is a bigger fund and more constrained on smaller companies, like Avid Technology [AVID], which makes software and systems for music editing and is big in movie production. The company had been mismanaged, but activists at Impactive Capital have helped bring in a good team and focus them on their core business, where they have an advantage. Avid just had an analyst day that got the market really excited about its growth prospects and free-cash-flow generation prospects over the next five years. It still looks cheap. If you look at free cash flow in 2025 before acquisitions, it suggests a 10% free-cash-flow yield. It’s growing double digits from here, could do some acquisitions, and has a strong competitive position with products that are top-of-line and have pricing power.
Do you own any other smaller off-the-radar companies?
Tivity Health [TVTY] has a $1.2 billion market cap and is best known for its SilverSneakers brand. Health plans pay the company, which provides access to gyms so seniors can have fitness and social interaction.
The company had bought Nutrisystem, which turned out to be a disaster, sold it, and got a new chief executive. With gyms shut down last year during the pandemic, Tivity created a digital product, and now the people engaging with it are different from those who were the core gym users. It’s going to generate $1.50 in earnings per share this year and is trading at about 17 times earnings. It will generate $1.60 a share in free cash flow next year, with a 6% free-cash-flow yield.
There’s huge growth in seniors overall. Tivity wants to be the company that can digitally engage seniors, and its intention is to add more services. We see a very long horizon for this company to be able to grow double digits, just based on market growth and the different offerings it can bring to members. It’s a company with long-term compounding potential.
Thanks, Samantha.
Write to Reshma Kapadia at [email protected]
