STK CEF: goal achieved, transition from sale to custody (NYSE: STK)

Thesis

At the height of the bear market’s summer rally, we wrote an article explaining why we were assigning a sell rating to a historically robust buy-write CEF that produced stunning positive results. total returns over the past decade. Nothing escapes the gravity of a bear market, even well-built vehicles like STK. Since our post, the fund is down -19% on a price basis and -17.8% on a total return basis, hitting our sell target:

We strongly believe that even robust buy and hold CEFs require adjustment and position adjustment based on macroeconomic market factors. It’s very simple – in a bear market, reduce or liquidate positions if you expect the vehicle’s risk factor to decrease over the course of the year. We are currently in a bear market driven by the Fed’s vertical rate hike and its relentless drive to “persevere“Tech takes it on the chin and will be the most affected asset class after its past excesses.

Columbia Seligman Premium Tech Growth Fund (NYSE: STK) is a closed-end buy-write equity fund focused on technology stocks:

Under normal market conditions, the fund’s investment program will primarily consist of investing in a portfolio of equity securities of technology and technology-related companies as well as selling call options on the NASDAQ 100 index or its exchange-traded fund (ETF) equivalent on a month-to-month basis. The aggregate notional amount of call options will generally be between 25% and 90% of the underlying value of the common equity holdings of the fund. The fund expects to generate current income from premiums received from writing call options on the NASDAQ 100 or its ETF equivalent.

Currently, approximately 89% of the fund is replaced by call options, but this source of premium is unable to cover losses incurred by the underlying assets. Our sell call would have saved an investor nearly 3 years of dividends based on the fund’s current yield of around 7.5%.

In our article, we wrote:

We believe we are currently in the midst of a bearish rally, triggered by significant oversold conditions and earnings that have been better than expected from a low to begin with. Inflation is not coming down yet, it is even a surprise for the Upside down. The Fed is not done climbing and rates will stay higher for longer. This is a relief rally that will turn when market participants realize that a dovish turn from the Fed is much further away than expected and the discount rate to use for tech stocks will be more raised. We expect another decline in this market which will not only result in a lower NAV for STK, but also in a compression of the premium to face values, as we saw in June. We are targeting a movement of -10% to -15% in STK in the coming months. Let’s not mince words – STK is top CEF technology and a gold standard in space via its performance, but it’s currently very expensive via its bounty and it won’t be able to escape the gravity of the next leg in this bear market.

Our objective having been achieved, we move on to Hold on the name. We believe the current revision to the June lows has extended the markets lower and we expect a brief recovery.

Performance

The fund is down -31% since the start of the year, in line with the Nasdaq:

Technology was the worst performer due to higher rates in 2022. On a five-year basis, the fund is still up 80% plus:

We can see from the chart above that although rising, STK fails to outperform QQQ during the respective timeframe.

Premium/Rebate to NAV

The fund is currently still trading at a slight premium to the net asset value:

As predicted in our previous article, the fund’s premium has moved from a very high level to a stable NAV. We see this type of behavior in risky environments when investors begin to discount the value provided by the call premiums written.

Conclusion

During the peak of the summer bear market rally, we wrote an article on STK in which we gave it a sell rating. We are targeting a total return of -15% in the coming months. After hitting a total return of -17.8% since our post and witnessing a temporary low during Friday’s washout price action, we are now shifting from short to hold on this name. The easy money from the short sale was made on this CEF. An investor heeding our advice would have saved three years of dividends by reducing their position in the name.