Charles Clough's Top Stock Picks

by: Insider Monkey

Charles Clough founded Clough Capital Partners in 2000. Prior to that, he spent 13 years working as a Chief Investment Strategist at Merrill Lynch. At Merrill Lynch, Clough was responsible for directing the global investment strategy research effort. He has been selected to the Institutional Investor All-America Research Team for 12 consecutive years. Clough is also one of the best strategists in areas including U.S. equities, global investments and fixed income. Clough has a B.A. from Boston College and an M.B.A. from University of Chicago.

Recently, Clough reported the latest holdings of his fund in a 13F filing. In this article, we are going to discuss the top stock picks of Clough and check out whether investors should follow his stock picks.

Microsoft Corp (NASDAQ:MSFT): MSFT is the biggest non-option position in Clough's portfolio. The top two positions of the fund are iShares Trust Puts and Caterpillar Inc Puts (NYSE:CAT). MSFT is the third largest position. At the end of last year, Clough had $84 million invested in MSFT. Clough also had another $10 million invested in MSFT call options. Many other hedge funds were bullish about MSFT as well. Nearly 100 hedge funds reported owning MSFT in their 13F portfolios. For instance, Boykin Curry's Eagle Capital Management had nearly $500 million invested in MSFT. Ken Fisher, Jean-Marie Eveillard and David Einhorn were also in favor of MSFT. All their funds had more than $350 million invested in this stock at the end of September.

We like MSFT. Like many other tech giants, the company is trading at low valuations. It has a forward P/E ratio of 10.46 and its EPS is estimated to grow at an average of 9.16% per year in the next five years. This indicates that MSFT has a 2014 P/E ratio of 8.8, lower than the market and most of its peers. Other mega-cap software stocks, Google Inc (NASDAQ:GOOG) and Oracle Corp (NASDAQ:ORCL), also have low multiples. GOOG's 2014 P/E ratio is 8.6 and ORCL's is 8.9. The low multiples indicate great potential in these tech stocks. We believe they are going to outperform the market and generate attractive returns over the next couple of years.

Another tech stock that Clough loves is Apple Inc (NASDAQ:AAPL). Over the fourth quarter, Clough boosted its AAPL stakes by 3%. As of December 31, 2011, the fund reported to own $80 million worth of AAPL shares. Similar to MSFT, AAPL is also very popular among hedge funds. More than one-third of the funds tracked by us disclosed owning AAPL. Besides Clough, Stephen Mandel, Chase Coleman and many other famous hedge fund managers also had millions of dollar invested in AAPL.

We totally agree with these hedge fund managers. Most of the products of AAPL are welcomed by consumers. We think these products will achieve more market penetration globally in the next few years. We also expect Apple to design and develop a few new products in the near future. AAPL returned 38.30% over the past 52 weeks, versus 3.78% for SPY. But we believe it is not late to buy AAPL as the stock is still trading at low multiples. AAPL has a forward P/E ratio of 10.67 and its EPS is expected to grow at 18.76% annually over the next five years. Therefore, its forward P/E ratio for 2014 is about 7.57, compared with 8.2 for Dell Inc (NASDAQ:DELL) and 6.0 for Hewlett-Packard (NYSE:HPQ).

A few other big positions in Clough's portfolio are Goodyear Tire & Rubber Company (NYSE:GT), National Grid Plc (NYSE:NGG) and Ares Capital Corp (NASDAQ:ARCC). All three stocks have attractive valuations, especially GT. It not only has low multiples, but also has high growth expectations. Its forward P/E ratio is 5.52 and it is expected to grow at 27.25% per year in the next five years, which means that its P/E ratio for 2014 is only 3.40. GT is also quite popular among hedge funds. David Tepper's Appaloosa Management LP invested $100-plus million in GT. Lee Ainslie and Ray Dalio were also bullish about the stock.

Overall we like Clough's stock picks. We think his bets on AAPL and MSFT will generate decent returns for his fund in the future.

Disclosure: I am long MSFT, DELL.