BSTZ: Technology Growth Fund Yields 12% And (Still) Trades At Wide Discount To NAV

seekingalpha11-24 12:56

Consider investing in BlackRock Science and Technology Term Trust for high-yield income, leveraging its top holdings in NVDA and other growth tech stocks.BSTZ offers a 12.3% yield at a -9.8% discount ...

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FinkAvenue  If you are feeling FOMO from not having invested in NVIDIA (NVDA) stock back in 2021 or earlier, it is not too late. There are other ways to leverage this ultra-high growth stock in your income portfolios in addition to buying shares of the ETF from YieldMax, NVDY – which I also recommend you consider for at least a small allocation in your own Income Compounder portfolio. There is a closed end fund from BlackRock that includes NVDA as a top holding (accounting for over 10% of portfolio holdings as of 10/31/24), along with several other high-growth technology and science companies that are both privately owned and publicly traded. That CEF is BlackRock Science and Technology Term Trust (NYSE:BSTZ). BSTZ is an equity fund holding mostly common stocks, with some call options written against its common stock holdings to generate income. It is a term trust, meaning that it has a lifetime of 12 years since the fund was launched in June 2019. That means that unless the fund is approved by shareholders to change to perpetual, it will liquidate at NAV in June 2031. From the fund’s fact sheet:   BSTZ fact sheet With the fund’s top holdings that include NVDA and other emerging growth science and technology stocks, I like what I see in this fund and at the current yield and discounted price I recommend investors seeking high-yield income consider adding some shares. I rate BSTZ a Buy and recently added some to my own Income Compounder portfolio at prices under $21. From the fund’s website, the basic key facts and statistics are shown below, including a 12.3% yield at the market price of $20.95, which was a -9.8% discount to NAV as of 11/21/24. The snippet below also includes links to two other important announcements from earlier this year.   BSTZ website In response to fund activist pressure, several BlackRock CEFs announced participation in a Discount Management Program, or DMP. The DMP announcement came out on May 3, 2024, followed by an announcement of an increased distribution rate on several of those CEFs on May 20. BlackRock Discount Management Program In a previous article in which I reviewed ECAT, another BlackRock CEF that is participating in the DMP, I discussed the specifics, which include taking steps to reduce the discount to NAV of those funds through a managed program that includes tender offers and increased monthly distributions. From the fund’s DMP press release: If a Fund’s common shares trade at an average daily discount to net asset value (\"NAV\") of more than 7.50% during a 3-month measurement period (each, a \"Measurement Period\"), the Fund intends to offer to repurchase 2.5% of its outstanding common shares at a price equal to 98% of the Fund’s NAV, as determined on the trading day after the tender offer expires, as soon as practicable following the Measurement Period end date. Since the implementation of DMP, the BSTZ discount to NAV has closed somewhat, and is now starting to widen again as shown on this chart from CEFConnect, but is still well above its 52-week average discount of nearly -15%.   CEFConnect Increased Distribution Rate The second announcement included a substantial increase in the distribution to 12% of NAV for each of three CEFs. Each of BMEZ, BSTZ and BIGZ will pay monthly distributions to shareholders at an annual rate of 12% of the Fund’s 12-month rolling average daily net asset value to be calculated 5 business days prior to declaration date. The result for BSTZ was a June distribution that was over a 100% increase above the May distribution.   press release Since that time, the distribution amount has varied slightly as the NAV has gone up and down over the past few months. At about $0.21 per month on average, the distribution is now higher than it was in January 2023 before it was cut twice.   Seeking Alpha The fund has made total distributions per share of $9.58, amounting to $754 million in total distributions since inception. BSTZ Tender Offer The increase in the distribution on its own was not enough to reduce the discount, so more actions were taken over the summer and fall months. Some of those actions were due to activist pressure and included a tender offer due to the discount falling below the DMP criteria. The tender offer for BSTZ was announced on October 1, 2024, with BSTZ having an average discount of -10.9% over the measurement period which ended 9/30/24.   DMP press release As of the expiration date of November 19, 2024, the tender offer for up to 2.5% of shares of BSTZ was completed and was heavily oversubscribed, according to this news report from Yahoo Finance.   Yahoo Finance Less than 10% of shares tendered were actually purchased, but at a price of 98% of NAV, the $22.34 purchase price was nearly $1.00 per share higher than today’s closing price of $21.40. Saba Activist Pressure In June, the activist investor Saba Capital took action to attempt to replace Board members at several BlackRock funds. That attempt was ultimately unsuccessful but did have the effect of putting additional pressure on BlackRock to close the discount on these funds that have traded at wide discounts for an extended period. For example, since its inception in 2019, BSTZ has almost always traded at a very wide discount. This five-year pricing chart shows that the average discount over the past five years has been over -11% and much wider than 15% on average in the past two years.   CEFConnect According to Yahoo Finance, Saba is the largest institutional holder of BSTZ with 6.7M shares, about 9% of the total outstanding shares as of 9/30/24.   Yahoo Finance Whether you approve of their methods and tactics or not, Saba has been successful at getting many CEFs to close the discount at which the funds have been trading. It remains to be seen how well it will work on BSTZ, but the fund managers also need to continue working on growing the NAV of the fund. BSTZ Portfolio Holdings and Strategy One of the first things that you will notice when reviewing the fund’s top holdings is that some of them have code names that start with the word Project. Those holdings represent private companies, and to find out what the translation is from code name to actual name requires reading the fund commentary.   BSTZ website The most recent fund commentary from Q2 2024 lists the fund’s top holdings and shows the names of the private companies that are indicated by “Project” names.   Q2 fund commentary I do not see Project Kafka listed, so perhaps the next update to the fund commentary will include that information. But you can see that the top private holdings combined make up about 20% of the total fund holdings. The fund commentary has more details regarding the private investment holdings and overall portfolio construction as of 6/30/24.  Private Investments: BSTZ held 22 private investments that accounted for 28.4% ($496 million) of the portfolio’s NAV. Portfolio: During the quarter, the Trust increased its exposure to the semiconductors sub-sector while sourcing capital from software. As of quarter-end, the portfolio held many small- and mid-cap companies, which provide more pure-play exposure into emerging technologies when compared to larger tech peers. We expect the secular growth trends driving technology to be multi-year transformations and persist regardless of the macroeconomic environment. The companies we seek are typically younger and more growth-oriented. Many of them do not have clear public company competitors and are pursuing entirely new and innovative strategies. Liquidity at NAV: There will be a liquidity event at NAV for Trust shareholders in 2031.1  Further information about the termination feature of the trust is outlined in detail in a footnote in the fund commentary. As I mentioned above, the fund is due to terminate in 2031 and there will be a liquidity event at NAV at that time, the details of which are not included in this write-up but can be read here. Investing in Next-Generation Technology Further descriptions of the fund’s investment philosophy are also included in the fund commentary and are helpful in understanding portfolio allocation. The BlackRock Science and Technology Term Trust is a closed-end fund (“CEF”) that takes a unique approach to investing in the technology sector by blending “next generation” technology stocks and private investments along with a tactical single-stock option-writing strategy. The Trust will invest in equity securities issued by mid- and small-capitalization companies that are believed to have above-average earnings growth potential.   Q2 fund commentary The Private Equity Outlook from the fund commentary, which was as of June 30, included some not very optimistic language about the impact of rising interest rates. Now that rates have started to come down, some of these concerns may have been alleviated in the five months since this commentary was written. Private equity outlook  Our private investments have not been immune to the rising interest rate environment, which has pressured public equities. Increased IPO (initial public offering) and M&A (mergers and acquisitions) activity could be an encouraging sign and would help companies raise capital. However, uncertainty lingers and has adversely impacted the Trust’s performance as private valuations have been marked down and exit strategies for some of our companies have been prolonged. We continue to seek opportunities to harvest the illiquidity premium by taking advantage of the “closed” structure and adding exposure to private investments as capacity increases. The Team continues to perform due diligence on multiple new opportunities and aims to manage exposure to private assets over the coming quarters given the current allocation to private equity.  In the second half of this year, private equity investments began to heat up again. In fact, according to an insight from EY Global Private Equity Pulse, private equity activity is up 36% over 2023.   EY The investment outlook for the fund was also very optimistic about the new frontiers in innovation due to AI and its associated technologies. The Investment Team believes that AI is the next frontier of innovation and is one of the biggest singular technology trends today. Despite the strong year-to-date performance of the technology sector, we believe that we are in the early stages of AI’s development. The tech sector may present an opportunity to investors with a dynamic we’ve seen over the past three decades: disrupting existing industries and creating new markets. Furthermore, although there has been significant volatility in the technology equity sector over the past several years, the future looks encouraging for the tech sector with lower interest rates and growing demands for disruptive technologies. The recent earnings report from Nvidia helps to support this theory. The unique market environment over the past several years has disrupted this pattern. In 2022, higher rates to combat inflation led tech stocks to drawdown, followed by a strong 2023 where a cohort of seven mega cap stocks, often referred to as the “Magnificent 7,” emerged. This was partially due to the uncertain macro environment and investor preference for established companies. In addition, the rise of generative AI benefitted those with significant data assets and data center infrastructure. We believe that the stock market rally could possibly broaden outside of today’s tech giants. What are the Risks? Probably the biggest risk is if something similar to the Russian invasion of Ukraine in February 2022 occurs in the near future. There have always been black swan events that nobody saw coming, like Covid-19 for example, and that would be the number one concern. A secondary risk is that the Fed does not reduce rates and keeps them higher for longer. That could stymie some of the innovation that is expected to occur when rates drop and businesses are willing to take on more risk. Other risks are that private equity dries up and M&A slows way down, and nobody can make a profit on venture capital deals. Another risk is that the tech sector falls out of favor with investors again. Comparing the price chart of BSTZ with QQQ, it appears that the two are highly correlated.   Seeking Alpha However, investors appear to be more optimistic than ever on the BSTZ fund. Furthermore, the total return from BSTZ has outperformed QQQ over the past year when you include dividends reinvested.   Seeking Alpha Summary: Buy BSTZ for Income from Technology Growth Stocks I think that the “science” part of the fund name is a bit misleading, although there is of course science behind all technology in one form or another. Really, BSTZ is an AI growth technology fund that generates income from covered calls, and while the market has been on a bull run, it has been able to do that successfully and pay out a high-yield distribution. If you believe that the bull run in technology is about to top out and reverse, then you may want to avoid BSTZ.  For me, I believe that the fund is working to close the discount with tender offers and a high-yield distribution, and I wish to take advantage of it while the getting is good. If the situation changes, then I may adjust my position. At a discount of nearly -10% with a yield over 12% and some good potential for additional capital appreciation over the coming months, I rate BSTZ a Buy at a price around $21.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485754848"}