Seeking a tech fund that provides a hedge against volatility, the author stumbled upon the BlackRock Science and Technology Trust CEF (NYSE:BST). This actively managed fund utilizes covered call option writing to boost performance while delivering a monthly fixed distribution. Initial concerns about this call writing limiting the upside, as observed in similar funds, were pleasantly contradicted. This fund has the potential to provide beta while outperforming the NASDAQ, depending on the efficacy of stock picking strategies.
Comparative analysis between BST and various NASDAQ covered call funds, along with the NDX represented by Invesco QQQ Trust ETF (QQQ) with dividends and distribution added, reveals that since its inception in October 2014, BST has outperformed its peers. However, it has not consistently beaten the NDX, albeit occasionally outperforming it. Upon splitting the performance record into two distinct time frames, from 2014 to the end of 2021 and the last two years, it becomes evident that BST outperformed the market during the former, pre-rate hike cycle, but fell short in the latter, possibly due to stock picking and performance caps from written calls. Nevertheless, the fund’s overall performance, especially considering the monthly distribution, is commendable.
Emphasizing high-growth science and technology companies, some of which are in the private equity stage, the actively managed BST maintains a portfolio with relatively low turnover at 30%. This suggests a fundamental high conviction view and commitment to positions over trading. Utilizing covered calls to earn additional income while enhancing performance, the strategy may cap both upside and downside to a certain extent. The fund’s monthly distribution plan allows for potential reinvestment and provides some liquidity.
Managed Distribution Plan
The current monthly payment of US$0.25 per share equates to an 8.8% forward yield. This Managed Distribution Plan (MDP) depends not on the fund’s interest income but on the manager’s ability to earn enough via capital gains and call options, exceeding MDP needs and continuing to grow NAV. While initial apprehensions about the MDP being predominantly made up of ROC were present, further examination over several years suggests otherwise, eliminating concerns about luring investors through such means.
After analyzing consensus estimates for over 80% of the fund’s holdings, it was reassuring to find the stock selection and weightings reasonably satisfactory. However, the current consensus price target for YE24 seems to offer limited upside potential at 7.3%. Notably, the presence of mid and small-cap selections, along with private equity, distinguishes this fund from a mere NASDAQ replica.
Utilizing consensus estimates, the author calculated a 19% EPS growth rate for the YE24-25 period, indicating high growth. Adjustments were made for stocks with distorted growth rates, such as Micron (MU) exhibiting negative EPS in YE23. Standout performers include MercadoLibre (MELI), NVIDIA (NVDA), and CrowdStrike (CRWD).
Despite calculating a portfolio PE of 29x for YE24, the PEG ratio stands at a somewhat reasonable 1.5x. While the PE to Growth metric is commonly used to assess relative valuation, it is crucial to consider PEG, PE, and EPS growth in the context of companies’ margins, free cash flow, return on capital metrics, competitive advantages, and market dominance. For instance, Apple’s (AAPL) 4.7 PEG does not seem to deter the market.
The unique combination of active management in the tech sector, diversity across market caps, and a covered call strategy, solidifies BST as an appealing investment with some protection against market volatility. Though concerns about ROC risk within the Managed Distribution Plan (MDP) persist, it may offer additional flexibility for investors. The recommendation stands—BST is a BUY.