STK CEF: A solid GARP record, back to about equal with QQQ

Interest rates have fallen sharply in recent months. The yield on the 10-year Treasury note peaked at 4.74% on April 25, when there were real fears of a sustained rebound in inflation. But the CPI’s early-year hot prints are a relic of the past and more optimistic trends in consumer prices allow the Fed to start cutting rates, probably later this month.

Lower rates can be an advantage for leveraged closed-end funds. Today, I’m focusing on the Columbia Seligman Premium Technology Growth Fund (NYSE:STK). It is primarily invested in well-known technology stocks, but also has an options strategy that is supposed to help protect against downside risks. What we found, however, is that STK generally hugs the performance of the Nasdaq 100 ETF (QQQ).

Moreover, during the correction from the end of July last year until the following October, STK performed QQQ. Price action for most of this year it has been decent, but still lags behind the total return of the Nasdaq 100. Potential investors should be aware that STK’s performance is different from the Global X NASDAQ 100 Covered Call ETF (QYLD), another popular technology fund focused on income.

I have a hold rating on the fund. I appreciate its management process and long-term track record, but investors can probably get comparable returns in a low-cost index product. There are also seasonal risks to weigh right now. I will conclude with a brief look at STK’s technical chart.

10-year total return chart: STK and QQQ follow closely, outperforming QYLD

right issuerSTK targets long-term capital appreciation and current income with a portfolio of technology stocks and an options overlay strategy designed to mitigate downside volatility and generate income. The strategy selects investments based on bottom-up fundamental analysis and valuation analysis, using a growth at a reasonable price (GARP) style to pursue more consistent performance and lower risk than its peers.

STK is a small CEF with only $530 million in assets under management as of August 30, 2024. Its annual expense ratio looks high at 1.26%, but that’s not too high for a closed-end fund; STK currently trades at a modest premium to its NAV.

With a high forward dividend yield of 6.43%option overlap and leverage allow for increased yield, which can attract dividend investors. I submit, however, that taking a total return perspective is essential when comparing performance.

Stock price timing has been decent over the past 12 months, but STK’s alpha, which was earned from late 2020 to early 2023, has declined over the past 18 months. CEF is also risky in that it has seen significant declines despite the fund’s objective of cushioning downside volatility.

Liquidity is a potential issue, as the average daily volume is only 32,000 shares and there is no 30-day average bid/ask spread listed. Thus, using limit orders during the trading day is prudent in my opinion.

Taking a closer look at the fund, STK is rated five stars by Morningstar due to its solid long-term performance history. The current price-to-earnings ratio is actually significantly below that of the Nasdaq 100 and closer to that of the S&P 500.

With a high price-to-earnings ratio of 12.9%, its GARP target aligns with current fundamentals. STK is primarily allocated to large-cap growth stocks, but there is significant exposure to blend style and SMID caps.

STK: Low P/E vs. Tech ETFs, Favorable Factor Profile

More than two-thirds of STK is invested in the information technology sector, and another 13% in the technology-related communications services sector. There is modest exposure to cyclical areas such as industrials and consumer discretionary. CEF is slightly less concentrated than the Nasdaq 100, with about 40% of its assets invested in the top 10 holdings.

I would note that the chip space is primarily allocated through Broadcom ( AVGO ), Lam Research ( LRCX ), NVIDIA ( NVDA ), and Applied Materials ( AMAT ), all in the top 10.

STK’s dividend payout history reveals that 2021 was the biggest year for distributions, but this year could see a new high depending on whether a special dividend it is paid in December.

STK: Information on holdings and dividends

I think seasonality plays an important role in performance trends. We took a look at QQQ’s calendar cadence as STK tracked the overall Nasdaq 100 total return.

September is the worst 12 months when scanning the last 10 years of price history. Thus, patience could pay off for potential investors in STK right now.

QQQ: Seasonal Risks in Tech Stocks in September

Technical takeover

I recognize that doing chart analysis on a high-yielding closed-end fund is not as useful as doing it with very liquid, low-yielding stocks and ETFs. However, it is useful to at least identify the main trend and key price points. Notice in the chart below that STK has been in an uptrend since hitting a low of $22 at the end of 2023. A series of higher highs and lows followed, as they generally do, but STK has lost momentum in the $34 to $35 range earlier this year. .

Still, with a long-term 200-day moving average on the rise, the bulls appear to be in control of the primary trend, despite the stock being below the mid-$30s resistance. I see support in the $28-$30 range, and STK has a large amount of volume on price from the mid-$20s to around $34, suggesting that the current zone could remain an ongoing battleground between bulls and bears.

Big picture, STK’s all-time high just below $40 is a long-term target if we see a breakout above $35.

STK: 200 dma rising, trading range developing

conclusion

I have a hold rating on STK. I conclude that its goals have been largely achieved over the past decade, but it has generally tracked the total return of the Nasdaq 100. I like, however, that its current valuation is attractive compared to the QQQ ETF.