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Summary BCX shares have been depressed after a recent closed-end fund merger because of selling by previous shareholders of BQR. BCX is trading at a 15% discount to NAV. BCX owns stocks with strong balance sheets which will be survivors if the energy bust continues. BCX uses an option writing strategy to reduce risk. Recent increase in VIX means higher options premiums and potential increases in the distribution rate. Many investors have been looking for a good way to benefit from a “bounce” in the energy sector. There are certainly big gains in store if you buy highly leveraged small cap energy stocks and if oil and gas prices quickly recover their losses. But there is also a risk that oil prices will stagnate for quite some time which would lead to many bankruptcies or restructurings in the energy sector. A safer way to invest in an energy rebound is to buy a diversified fund that mainly holds strongly capitalized large cap energy stocks that also hedge using an option over-writing strategy. There is one closed-end fund that currently trades at a 15% discount that fits into this category. The BlackRock Resources & Commodities Strategy Trust (NYSE: BCX ) seeks high current income and current gains, with a secondary objective of capital appreciation. The fund normally invests at least 80% of its total assets in equity securities issued by commodity or natural resources companies, or derivatives linked to commodity/natural resource companies. The fund generally invests in a portfolio of equity securities and utilizes an option over-writing strategy in an effort to seek total return performance and enhance distributions. On December 8, 2014, a three way fund merger was completed where BCF and BQR were merged into BCX. I believe that one cause for the currently wide discount to NAV is that some of the old shareholders of BQR are unhappy with the merger and have been selling their shares of BCX acquired via the merger. I wrote an article on BQR (Blackrock EcoSolutions) about a year ago. The fund was marketed as investing in companies that are “environmentally friendly”. A few weeks ago, I received a message from one of my Seeking Alpha readers who said he bought BQR as a long term investment because he liked their socially conscious investments and good dividend. Shortly after the merger was completed, he looked at his brokerage account and could no longer find BQR. After some digging, he realized it was replaced by BCX. In his words- “If it wasn’t so real I would think this is a cruel joke. Eco Solutions was replaced by Big Oil”. Distributions for BCX vary over time and were reduced late last year because of drops in the underlying portfolio value. The fund currently pays a monthly distribution of $0.0771. Because of weakness in the energy sector, tax loss selling and other selling by prior BQR/BCF shareholders, this may be a good time to buy BCX for bottom fishers or contrarian investors. The discount to NAV is -15.32% which is well above the six month average discount of -13.87%. The 6 month discount Z-score is -1.47, which means that the discount to NAV is about 1.5 standard deviations below the average discount over the last six months. The one year discount Z-score is also attractive at -1.46. Because of the relatively high distribution rate of 9.72% and high discount to NAV, you get to recapture a decent amount of the discount every year. Buying BCX at the market price and receiving NAV from a distribution is equivalent to a gain of 18% on those shares. Multiply this by the distribution rate and you get a discount capture “alpha” of about 1.75% per year. This is more than the annual expense ratio of 1.25%, so adjusted for discount capture, BCX has a negative expense ratio and the fund pays you to own it. Distributions for BCX vary over time and were reduced late last year because of drops in the underlying portfolio value. The fund currently pays a monthly distribution of $0.0771. But if there is a recovery in the energy sector, we could easily see distributions increase dramatically. The recent increase in options volatility, with the VIX above 20, should also benefit funds like BCX that use an options overlay strategy and could lead to a higher distribution rate as they capture the higher option premiums. BCX is more liquid than most other closed-end funds. It trades about $4.5 million a day and usually has a bid-asked spread of only a penny. In summary, BCX is currently a good holding for a patient investor who wants to participate in the energy sector, but wants to get paid a generous distribution while waiting for a rebound. There is good chance of a rebound in the NAV along with a narrowing of the discount within the next year. Top Industry Sector Holdings (12/31/2014) Energy 33.4% Agriculture 31.2% Mining 22.8% Other 10.5% Cash + Derivatives 2.0% Top 10 Holdings (12/31/2014) Exxon Mobil (NYSE: XOM ) 5.92% Chevron (NYSE: CVX ) 5.69% Monsanto (NYSE: MON ) 4.32% Conoco Phillips (NYSE: COP ) 3.89% Royal Dutch Shell (NYSE: RDS.A ) (NYSE: RDS.B ) 3.72% Rio Tinto (NYSE: RIO ) 3.40% Weyerhauser (NYSE: WY ) 2.56% Potash Corp. of Sask. (NYSE: POT ) 2.49% CF Industries (NYSE: CF ) 2.44% Syngenta (NYSE: SYT ) 2.41% Market Cap Breakdown (12/31/2014) Large Cap (> 10 bill) 79.2% Mid Cap (2-10 bill) 13.2% Small Cap ( < 2 bill) 5.5% Cash + Derivatives 2.0% Geographic Breakdown (as of 12/31/2014) United States 67.0% Canada 10.1% United Kingdom 9.2% Switzerland 2.5% Hong Kong 2.3% Cash + Derivatives 2.0% Norway 1.7% France 1.0% Japan 0.9% Australia 0.8% Ticker: BCX BlackRock Resources & Commodities Trust Pays monthly distributions Total Net Assets= $1,112 million Total Common assets= $1,112 million Monthly Distribution: $0.0771 ($0.9252 annual) Annual Distribution (Market) Rate= 9.72% Fund Baseline Expense ratio= 1.25% Discount to NAV= -15.23% Portfolio Turnover rate= 62% Effective Leverage: None Average Daily Volume: 469,000 shares Average $ Volume: $4,500,000 % Overwritten by Options= 23.82% Type of Options= Single Stock Scalper1 News
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