BST: Tech With A Twist (NYSE:BST)

Summary

Searching for tech funds that offer some hedge vs volatility I came across the BlackRock Science and Technology Trust CEF (NYSE:BST). This is an actively managed fund that uses covered call option writing to enhance performance while at the same time providing monthly fixed distribution. The main fear I had was that this call writing would limit the upside as I have seen in Global X NASDAQ 100 Covered Call ETF (QYLD) or Nuveen NASDAQ 100 Dynamic Overwrite Fund (QQQX). To my pleasant surprise this fund can provide beta but beating the NASDAQ (NDX) is dependent on stock picking.

Performance

I compared BST vs a few NASDAQ covered call funds as well as the NDX represented by Invesco QQQ Trust ETF (QQQ) with dividends and distribution added. Since its inception in October 2014, BST handsomely beat peers but not the NDX, although at times it performed better.

I then split the performance record into two time frames to gauge how active management has done in generally positive and then adverse market conditions. From 2014 to the end of 2021 i.e., the NDX peak, pre-rate hike cycle, BST beat the market. During the last two years, it has fallen short, most likely due to stock picking as well as performance caps from written calls. Overall it’s a good performance, especially considering the monthly distribution that requires a higher level of short-term liquidity i.e. not fully invested as the QQQ.

Investment Strategy

As the name of the fund indicates, it invests in high-growth science and technology companies, and some are still in the private equity stage. As an actively managed fund, the portfolio will change, however, turnover is relatively low at 30%, which suggests they have a fundamental high conviction view and stick with positions vs trading. The second part of the strategy is to write a covered call to earn extra cash and enhance performance. As can be seen in the fund’s example this strategy can limit upside and downside to a point. Finally, the fund has a monthly distribution plan that I would utilize to reinvest vs drawing but provides some liquidity.

Managed Distribution Plan

At present, BST is paying US$.25 a share every month, this equates to an 8.8% forward yield. This is a Managed Distribution Plan (MDP) and not predicated on the fund’s interest income but rather on the manager’s ability to earn enough via capital gains and Call options to meet and exceed MDP needs and keep growing NAV. I was initially worried that this MDP was made up of ROC (Return of Capital) since so far in 2023 most of the distribution was from ROC. However, checking back a few years this does not seem to be an issue or modus operandi to lure investors.

Portfolio Upside

As I gathered consensus estimates for over 80% of the fund’s holdings, I was pleased with the stock selection and weightings for the most part. However, the current consensus price target for YE24 did not provide much upside potential at 7.3%. The other observation is the mid and small-cap selections as well as private equity. This is not an NDX replica.

EPS Growth

Using consensus estimates I calculated that BST has a 19% EPS growth rate for the YE24-25 period, which I would classify as high growth. I did adjust some data for those stocks with distorted growth rates i.e. Micron (MU) has negative EPS in YE23. Standouts are MercadoLibre (MELI), NVIDIA (NVDA), and CrowdStrike (CRWD).

Valuation

Despite a calculated portfolio PE of 29x for YE24, the PEG ratio is an almost reasonable 1.5x. The PE to Growth metric is widely used to gauge relative valuation with a 1x ratio deemed fair and lower undervalued. However, PEG as well as PE and EPS growth should also be viewed in context with companies’ margins, free cash flow, and return on capital metrics as well as competitive advantages and market dominance i.e., Apple´s (AAPL) 4.7 PEG does not phase the market.

Conclusion

I Rate BST a BUY. The combination of active management in the tech sector, across market caps, with a covered call strategy makes this an attractive fund with some protection vs market volatility. The MDP ¨Yield¨ adds some concern given ROC risk but may add flexibility for investors.