BCX - BCX: Buy Commodities Now - Fabulous Gains For Your Future Plus Fat Dividends

2023-07-26 07:35:00 ET

Summary

• It's true that inflation is slowing down, but that doesn't mean comparative prices will fall.
• Large commodity-oriented companies are masters at long term planning.
• There's plenty of income to be had for those who are willing to have it.

Co-authored by Treading Softly.

I can remember back to my high school years and taking classes in Physics. In my studies, I had to learn a lot of terminology about many different ways to measure things.

For example, I had to learn about velocity, the speed at which an object is moving, or force the push and pull that one object has on another to change its velocity. There was one term that frequently tripped up the class, and it seemed so simple, and yet I was frequently so confused. That term was acceleration – acceleration is the rate of change of an object's velocity.

You can have an object that is moving at 100 miles an hour but has zero acceleration. You can have an object that is moving at 10 miles an hour yet accelerating at a rate of an additional mile per hour every second.

For people who drive cars, you understand accelerating from one set velocity to another. When you change onto the highway, you exit the merge ramp trying to match the speed of the other cars around you so that you can successfully merge. When you stop accelerating, you are still traveling at a faster speed than before. It seems like a pretty basic concept to grasp as we get older.

That understanding can help us understand some economic concepts as well. We understand that commodities have prices, and we understand that inflation is the change of those prices over time. So, in essence, the prices are "velocity," and inflation is "acceleration." Just because inflation is slowing down doesn't mean that the price is falling. It just means that the price is not increasing as rapidly as it was previously.

When inflation was high, it became very attractive for many investors to start buying commodity-based plays, expecting strong returns because of the change in the price of commodities, and indeed many commodity plays performed exceptionally well in the initial days of high inflation. Yet many investors have sold out of those investments, thinking that the deal is done; a professional income investor knows that those purchases you've made in strong dividend-paying securities can continue to reward you because the dividends that they're paying will remain elevated so long as commodity prices remain elevated from historical norms.

Today I want to look at one fund that allows you to buy excellent commodity-based plays at a steep discount and provide you with great income while doing it.

BlackRock Resources & Commodities Strategy Trust ( BCX ) is a closed-end fund ("CEF") that invests in commodity companies, yielding 6.5%. This includes three main categories: Energy, Mining, and Agriculture.

In the recent past, BCX was roughly split evenly between the three. However, over recent months we have seen BCX become more heavily weighted towards energy. Source .

BCX has a very straightforward strategy. It buys very large companies, with most of its portfolio concentrated in companies with market capitalizations of over $10 billion.

BCX's top 10 holdings make up nearly half of its entire portfolio. So we are not talking about a fund that is taking a lot of risks with small up-and-coming companies. BCX then seeks to limit volatility and increase income by selling covered calls.

Over the past two years, we have seen BCX's discount to net asset value increase to its steepest discount since 2020.

BCX's underlying portfolio has been experiencing strong performance. Over the past three years, BCX has seen a stronger return on NAV than the S&P 500 (SP500).

A large portion of this performance can be attributed to investors running into commodity stocks when inflation started running hot. High commodity prices are generally very good for companies in the business of selling commodities.

That storyline is no longer clear, and many traders have moved on. Yet anyone who goes to the store can tell you that while inflation on commodities might have slowed down, things are still a lot more expensive than they were before COVID!

Inflation is a measure of the pace of price increases. Consider oil; with prices in the $70s, a barrel of oil is much cheaper than the 2022 peaks above $100. Yet to price in the $70-$80 range is much higher than in 2015-2020, where oil spent most of its time in the $50s.

The price spike was definitely nice for oil companies, but since oil companies tend to hedge, they don't benefit too much from brief price spikes. What benefits oil companies is long-term sustained prices. $70-$80 is a lot higher than oil was pre-COVID, and those prices are great news for companies that positioned their businesses to manage with $50-$60 oil.

Similar things can be said about various commodities. Prices are lower than they were in 2022, but they are not low when we look over the past decade of prices. Traders in the market are responding to the short-term change in commodity prices, but it is the long-term sustained higher prices relative to the 2010s that will be the primary driver of profits for companies in these sectors. Inflation is slowing down, but high prices are here to stay. BCX is a great way to gain exposure to commodity companies at a steep discount.

Conclusion

With BCX, you can gain exposure to strong commodity plays and purchase them at deep discounts. This means that you're actually better off buying them through the fund wrapper than going out and buying them yourself individually. Large commodity-based companies don't depend on commodity price swings for profits. They are long-term planners, and they benefit from the long-term slow change of commodity prices. So while commodity prices may no longer be at their absolute peak, they are still significantly elevated compared to where they were a decade or two ago. This bodes well for continued strong profits and continued rewards to shareholders.

It always fascinates me the short-term attention span that many in the media have. When oil prices were at their absolute max, everyone was clambering over the top of each other, trying to demand that oil companies pay back government agencies for the "windfall" profits. Yet as they continue to remain elevated compared to prior levels, all that chatter has basically gone away. Likewise, traders who came in and out of commodity-based plays have left, leaving the door open for strong rewards to those who invest right now.

Being a professional income investor is more like being an adult at the fair instead of being a young child. If you have ever gone to a county fair with a young child, you know that they get so caught up in the excitement, so caught up in all the lights and noise that all they can do is literally bounce around from thing to thing, barely taking a moment to enjoy what they're doing before clamoring to the next. But as an adult, You can enjoy walking through the fair, seeing different sights, and taking your time.

I don't want your retirement to be one where you're desperately bouncing from trade to trade to trade to try and make ends meet when you can simply take your time and get income from the market and enjoy your retirement.

That's the beauty of my Income Method. That's the beauty of income investing.

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