Patient Capital's Samantha McLemore names this energy company as a buy for its significant upside

Rising yields and the threat of higher for longer rates weighing on investor sentiment yet again. Our next guest though says the bull market is showing no signs of breaking down. Joining us now, Patient Capital founder and CIO Samantha McLemore. It’s nice to see you. Hi, Scott. Thanks for having me. Wow. So you’re you’re still pretty bullish, undeterred by this recent volatility, the backup in rates and everything else. Tell me why. Well, we think this is a normal natural pullback. We had a huge move in the market, almost 30% upside in the S&P from the lows in October. So that’s a huge move and it was the 4th longest period with the market staying above the 50 days. So strong, prolonged and I think you know the S&P is now 4% off its highs. That is a very measured pullback, especially when you think about interest rates going from the high threes to to almost 4.7% this year, crude moving up significantly to the mid 80s from the high 60s, geopolitics, Fed rate cut concerns. Given all of that, I think most people would have estimated that the market would have had a more significant pull back. So I think that the market shows, you know, a very measured response, sure. But I mean if if if what got you here at least in part you know was the expectation that rates were going to do just something different than what they’re doing now. If if that’s changed which it seems to have changed, doesn’t the outlook need to change at least somewhat in the near term, not talking to the big picture or where we think the overall trend is going, but in the in the near term here, well, I would say that must not have been what got us here because coming into the year people estimated we’d have six rate cuts this year. Now people are estimating less than two by December and the market has been OK. So I think what this rally and a continued bull market depends on is the economy remaining strong, inflation remaining contained, you know, employment remaining steady so far, you know we see all of that. So we don’t need cuts at all this year. It depends. We’ll see. I think it depends on what the economy does. If the economy slows, then we might need rate cuts. I think what the market fears is that we will stay restrictive too long and that that will, you know, lead to a recession. So I think as long as that doesn’t happen, no one really knows what the neutral rate is and and where that how high that interest rate can stay. But that’s something that we’re watching quite closely and I think given what we’re seeing, given what we saw for retail sales, employment, the economy remains quite strong. So what should I do what what are you guys doing within the market to express the view? Well, we love buying beaten up names on pullbacks, you know where we think the intrinsic value of businesses is much higher than where names trading in the market. So you know, there are a number of names like that that that we’re adding to in this market. One example of that is Cosmos Energy, which is you know a smaller earlier stage E&P company. It’s one of the few energy names that we can find that we think has significant upside. Even if a normalized crude price is at 65 rather than 85 S, the stock’s trading at $6 a share now and we think it’s worth 12 to 14 and even higher than that if prices stay here beyond sort of idiosyncratic stories like a like a Cosmos for example, Do do you believe in the broadening story continuing well beyond mega cap tech? I I ask you the question because it sounds like you would given your overall view of the market. Well we certainly saw broadening out of the market late last year and early this year and so that’s what we’ve seen and and last year a lot of the economically sensitive names in my opinion were pricing and recession. So as the odds of a recession have come down and people have gotten more comfortable with economic growth, we’ve certainly seen that broaden out. Now it still looks like large cap growth are the market leaders. They continue to lead both on the upside and the downside. They don’t have as much upside to intrinsic value as other names that we find. But we have a balanced portfolio, you know, across the different types of mispriced securities. Yeah, I mean you so you added NVIDIA around 5:50 or so in, in the first quarter. It’s obviously run a lot. You do have some people talking about bubble like qualities out of some of those names trying to justify what they’re, you know, are there multiples really worth what they’ve expanded to? I know that Nvidia’s multiples come in as the earnings expectation has gone up, but how would you assess that broad picture of the mega caps in general? Yeah. So we just looked at the MAG 7 because there’s a lot of talk about how narrow the markets been, how they make up most of the returns, whether it’s bubble like I think we can confidently say it is not at all on the level of the tech mobile bubble. You know, I think tech peaked at 55 times then and these names are 35 times and and tech is 35 times. And these are some of the best companies that have ever existed in the history of the world. These MAG 7, if you look over the past decade, they’ve, you know, grown revenues 24% a year, free cash flow per share over 40% a year. They’ve doubled their returns on capital. They have huge free cash flow margins, great balance sheets and they’re still growing quite strongly. So during that time, if you exclude Tesla, which we do think you know is overpriced for what the current business is, the multiple on the other six went from 23 times to 25 times. So the premium to the market actually shrank from a 50% premium to a 25% premium. So I think it’s really hard to argue that those names are significantly overpriced in aggregate.