BCX: A Discounted Entry Point Into The Commodities Sector (NYSE:BCX)

Fund Overview

BlackRock Resources & Commodities Strategy Trust (NYSE:BCX) is an equity closed-end fund. The fund invests in stocks with companies operating in the commodity space, with the distribution below based on the latest report provided by BlackRock (as reported as of September 30, 2023). These distributions will be updated as of 12/31/23 when the fund publishes its annual at the end of February 2024.

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The remaining 1.6% of assets are held in a variety of corporate bonds and money market accounts.

With a high-level understanding of the fund and what assets are held within the fund, I’ll begin to present a thesis for a long-term buy of BCX.

NAV Discount

BCX’s significant 15% discount to its Net Asset Value (NAV) presents a compelling opportunity for investors (as of February 24th, 2024). NAV, in this context, represents the total market value of all the stocks held within the fund’s portfolio. By purchasing BCX shares at a substantial discount to NAV, investors effectively gain exposure to the fund’s entire underlying basket of securities at a reduced price. This is similar to finding your favorite collection of items on sale at a heavily discounted price.

Closed-end funds like BCX occasionally experience these discrepancies between their market price and NAV. Market dynamics and investor sentiment can cause these temporary fluctuations. Historically, as market conditions change or investors recognize the inherent value of a discounted CEF, the NAV discount often narrows. This can lead to capital appreciation for BCX holders, in addition to any potential gains from the underlying stocks themselves.

Yield

BCX offers a substantial appeal for income-seeking investors with its 7.00% dividend yield. While the fund’s net expense ratio does reduce this to a net yield of 5.9%, this remains attractive in the current interest rate environment. However, it is essential to consider the risk inherent in equities as compared to risk-free treasury securities.

The key to further potential lies in the evolving monetary policy landscape. As the Federal Reserve pivots towards interest rate cuts, widely anticipated later this year, BCX’s income stream could gain even greater appeal. A recent CNBC survey highlights market expectations for a 75 basis point (0.75%) rate cut. If this reduction translates directly to lower Treasury yields, BCX could offer a significantly enhanced income advantage over these traditionally “safe” assets.

It’s worth noting that this rate-cut scenario could create two layers of potential return for income-oriented investors in BCX:

• Yield Advantage: As Treasury yields decline, the fixed yield from BCX becomes proportionally more attractive.

• NAV Appreciation: Lower interest rates generally boost the valuations of dividend-paying stocks, including those held by the fund. This could potentially contribute to a narrowing of the NAV discount, resulting in capital gains for BCX shareholders.

Weighted Consensus Estimates

The third and final catalyst for upside for BCX is the weighted consensus estimates of the stock that make up the fund. Using the fund allocation available within their prospectus as of September 30, 2023 (currently the latest available report) and the average analyst price target provided by Seeking Alpha, which lends itself to a weighted upside of 19% for the assets held by BCX. Below are the top 10 holdings of BCX, comparing the current stock performance against the consensus analysis estimates.

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(Note: no consensus estimate is provided for SMFTF)

Summary

The combination of BCX’s compelling NAV discount, substantial dividend yield, and the potential for underlying asset appreciation positions it as a strong contender for investment consideration. The current discount presents the opportunity to acquire a diversified portfolio of commodities-focused stocks at a bargain price. Meanwhile, the income stream provides a cushion – particularly during periods of market volatility – and could become even more attractive relative to Treasuries once the anticipated interest rate cuts materialize.

For income-oriented investors, BCX offers a potential alternative to traditional fixed-income assets, especially in a declining interest rate environment. The confluence of rate reductions and BCX’s yield could create a compelling income advantage. Furthermore, lower rates could act as a catalyst for the NAV discount to narrow, potentially leading to additional returns for BCX shareholders.