STK CEF: A Solid GARP Track Record, Returns About On Par With QQQ

Thomas Barwick Interest rates have fallen hard in the past few months. The yield on the 10-year Treasury note peaked at 4.74% on April 25 when there were real fears of a sustained pick back up in inflation. But hot early-year CPI prints are a relic of the past, and more sanguine consumer price trends allow the Fed to begin cutting rates, likely later this month. Falling rates can be a boon for leveraged closed-end funds. Today, I’m focusing on the Columbia Seligman Premium Technology Growth Fund (NYSE:STK). It’s primarily invested in well-known tech stocks, but it also has an options strategy that purportedly helps protect against downside risks. What I found, however, is that STK generally hugs the performance of the Nasdaq 100 ETF (QQQ). What’s more, during the correction from late July last year through the following October, STK underperformed QQQ. Price action for much of this year has been decent but still lags the total return of the Nasdaq 100. Prospective investors should be aware that STK’s performance is different from the Global X NASDAQ 100 Covered Call ETF (QYLD), another popular income-focused tech fund. I have a hold rating on the fund. I appreciate its management process and long-term track record, but investors can likely receive comparable returns in a low-cost index product. Also, there are seasonal risks to weigh right now. I’ll wrap up with a brief look at STK’s technical chart. 10-Year Total Return Chart: STK and QQQ Track Closely, Outperforming QYLD Stockcharts.comAccording to the issuer, STK targets long-term capital appreciation and current income with a portfolio of technology stocks and an option 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 aim for more consistent performance and lower risk than its peers. STK is a small CEF with just $530 million in assets under management as of August 30, 2024. Its annual expense ratio appears high at 1.26%, but that’s not an overly elevated figure for a closed-end fund; STK currently trades at a modest premium to its NAV. With a high forward dividend yield of 6.43%, its options overlay and leverage allow for an increased yield, which may appeal to dividend investors. I assert, however, that taking a total return perspective is key when comparing performances. Share-price momentum has been decent in the last 12 months, but STK’s alpha which was earned from late 2020 through early 2023 has waned in the last 18 months. The CEF is also risky in the sense that it has seen material drawdowns despite the fund’s goal of cushioning against downside volatility. Liquidity is a potential concern since average daily volume is just 32,000 shares, and there is no listed 30-day median bid/ask spread. Thus, using limit orders during the trading day is prudent, in my view. Looking closer at the fund, STK is five-star rated 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 12.9% price-to-earnings ratio, its GARP goal aligns with current fundamental data. STK is primarily allocated to large-cap growth equities, but there is a material exposure to the blend style and SMID caps. STK: Low P/E Versus Tech ETFs, Favorable Factor Profile MorningstarMore than two-thirds of STK is invested in the Information Technology sector with another 13% in the tech-related Communication Services sector. There’s modest exposure to cyclical areas like Industrials and Consumer Discretionary. The CEF is a bit 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 particularly allocated to via 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 top year for distributions, but this year could feature a new high depending on whether a special dividend is paid in December. STK: Holdings & Dividend Information Seeking AlphaI believe seasonality plays an important role in performance trends. I took a look at QQQ’s calendar cadence since STK has followed the general total return of the Nasdaq 100. September is the worst of the 12 months when scanning the last 10 years of price history. Thus, patience could pay off for prospective investors in STK right now. QQQ: Seasonal Risks in Tech Stocks in September Seeking AlphaThe Technical Take I concede that performing chart analysis on a high-yield closed-end fund is not as useful as doing so with highly liquid and low-yield stocks and ETFs. Still, it’s helpful to at least identify the primary trend and key price points. Notice in the chart below that STK has been trending up since notching a bear-market low of $22 back in late 2023. A series of higher highs and higher lows as generally ensued, but STK lost momentum in the $34 to $35 range earlier this year. Still, with a rising long-term 200-day moving average, the bulls appear in control of the primary trend despite shares being below mid-$30s resistance. I see support in the $28 to $30 range, and STK has a high amount of volume by price from the mid-$20s up to about $34, suggesting that the current zone could remain an ongoing battleground between the bulls and bears. Bigger picture, STK’s all-time high just below $40 is a long-term target if we see an upside breakout above $35. STK: Rising 200dma, Emerging Trading Range Stockcharts.comThe Bottom Line I have a hold rating on STK. I conclude that its objectives have largely been achieved in the past decade, but it has generally tracked the total return of the Nasdaq 100. I do like, though, that its current valuation is attractive compared to the QQQ ETF.

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