As 2023 comes to a close, Clough Capital CEO and President Vince Lorusso discusses his top stock picks as we move into the new year.
When discussing the funds he manages, Lorusso says, "There's really two different areas of investments. I kind of characterize them as stable growth companies, meaning they might be a little bit more defensive if we do have a little bit of a slowdown in the consumer." Lorusso's top picks for stable growth include Service Corporation International (SCI), Rollins, Inc. (ROL), and gold miners and utilities sectors.
"In the other part of the portfolio, are these more dynamic growth companies that we think do have more beta potentially and are most exposed to some of the secular and also cyclical enthusiasm we're seeing around things like AI and EVs." Lorusso's top picks for dynamic growth include, Lam Research (LRCX), DraftKings (DKNG), and TransMedics Group (TMDX).
"We think that it's important for investors to maintain a somewhat diversified portfolio," Lorusso adds.
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Video Transcript
RACHELLE AKUFFO: So let's get into the stock picks here. Let's start off with the ones that come under stable growth. So in terms of the ones you're looking at, SCI Corp, Rollins, Gold Miners, Utilities, walk us through those base cases and what your expectations are?
VINCE LORUSSO: Yeah, happy to do that. So I manage two ETFs at Cloud Capital. CBLS is a long-short and CBSI is a select equity long-only strategy. And we list all of our holdings on CloudETFS.com so folks can see what we own. Those holdings are subject to change.
But what you'll notice within the portfolio is there's really two different areas of investments, and I kind of characterize them as stable growth companies, meaning they might be a little bit more defensive. If we do have a little bit of a slowdown in the consumer, we start to think about credit availability and some of the delinquencies and defaults that we are seeing in the economy despite this really bullish kind of move for equities. We think there are some reasons for pause or conservatism within some portion of the portfolio and that looks like companies to us that have big moats around the business, they have big market share, they have recurring revenues or a strong backlog of revenues that they will at some point be able to realize as actual revenues and profits.
So we think that it's important for investors to maintain a somewhat diversified portfolio, right? At this point in the year, everybody's kind of looking back on 2023 saying the thing to do was own Fang or to own the SPY. But we think investors can do better than that by owning stocks that have various attributes.
A company like SCI is in the funeral and cemetery business. So by far the largest market share, strong free cash flow yield, strong management team, and a significant backlog of pre-need sales that have already been made, but not yet recognized from an accounting perspective. So we think that's going to be obviously a defensive part of the market for obvious reasons.
A company like Rollins is in the pest extermination business. And you think about that as not the most exciting business to be in, but if you have millions of customers paying effectively a subscription revenue on a monthly basis, that's not a service that businesses are likely to forego. So if you're in the hospitality or restaurant sectors of the economy, or if you have a residence, or a hotel, you're likely to bear that cost. Frankly, it's a fairly insignificant cost as a percentage of the P&L and it's not one that you can forego.
So we do think about those defensive businesses as providing some value here. And then meanwhile, on the other part of the portfolio are these more dynamic growth companies that we think do have more beta potentially and are more exposed to some of the secular and also cyclical enthusiasm we're seeing around things like AI and EVs.
RACHELLE AKUFFO: So Vince, I want to get into some of these dynamic growth names that you're looking at. And for people who are not familiar, you're looking at these long positions and some of these more nuanced have some more of a distinct growth story here. You've got Lam Research, DraftKings, TransMedics. How should people be approaching that? And how are you-- how did you come up with these picks?
VINCE LORUSSO: Well, yeah, it's a great question. So as active managers, we're performing a lot of fundamental research. And the team at Cloud Capital has been investing across sectors, and geographies, and market caps for more than two decades now. And when we take a look at the portfolios, specifically the cloud ETFs that I manage, you'll see a somewhat eclectic group of securities across industry, market cap sector, even geography, but they have some compelling aspect of the business that we think is really positioning shareholders for some appreciation, either in the form of increased profitability or expanding multiples, oftentimes a combination.
And sometimes within those portfolios we talk about active themes or areas of exposure that we think clients can benefit from. One of the obvious ones, of course, is AI. When you talk about Lam Research, providing some of the equipment into the production of semiconductor chips. The sort of go-to names I think within AI folks are quite familiar with, the NVIDIA, Microsoft names, but we can go a little bit further down in market cap and identify companies that we think will benefit from the buildout of data centers and semiconductor capacity and distribution.
So, you know, again, that's an example of Cloud Capital as an active manager saying, look, we understand what the big, broad themes are, we can understand the benefit of some passive strategies within an investor's allocation model, but can we do the fundamental, rigorous, at times bottom up research to identify stocks that are not as broadly followed in the capital markets, and can we give our investors some exposure to those areas? And that's what we strive to do year in and year out.
