Scottish Mortgage is down 20%: should I buy today?

The Scottish Mortgage Investment Trust share price has been volatile, reflecting sharp moves in the prices of major holdings such as Tesla.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Scottish Mortgage Investment Trust (LSE: SMT) has become a superstar of the UK fund sector in recent years. The trust’s positions in growth stocks such as Tesla, Amazon and NIO have paid off with big gains.

The Scottish Mortgage share price has risen by 120% over the last year, compared to a gain of just 35% for the FTSE All-Share Index. Over 10 years, the results are even better. SMT is up by 670%, versus a gain of just 23% for the FTSE All-Share.

However, there may be trouble in paradise. Although SMT’s managers have taken profits on big winners such as Tesla in recent months, the firm remains heavily exposed to such names.

The recent correction we’ve seen in US tech stocks has hit SMT’s share price, which has fallen 20% since peaking on 15 February. I’m wondering whether this could be an opportunity for me to buy Scottish Mortgage shares for my portfolio — or whether it’s the start of a larger slump.

How I’m approaching this

Scottish Mortgage is an investment trust. In simple terms, it’s a company that invests its own money in other companies. Investors can buy shares in Scottish Mortgage to benefit from growth in the trust’s portfolio.

This means that to understand the valuation of the trust, I need to look at its shareholdings. The largest holdings will have the biggest impact on SMT’s share price, so I started with these.

At the end of January (the latest data available), Scottish Mortgage’s five largest holdings were Chinese e-commerce group Tencent, genetic sequencing firm Illumina, online mega-giant Amazon, and electric car firms Tesla and NIO.

Are these top stocks heading for a crash?

All of the five stocks I’ve listed are growing fast. They all have strong valuations, but I have to admit Tencent, Illumina, and Amazon don’t look as expensive as I expected.

In a market sell-off, I’d expect these firms, and many of SMT’s other holdings, to suffer short-term losses. But from the top five holdings I’ve listed, the only two that concern me are Tesla and NIO.

NIO has yet to turn a profit. I don’t know when it will. This makes valuation difficult, in my view.

The situation with Tesla is a little more complicated. This business is larger and more developed — and it is profitable. However, even the best business in the world is a bad investment if it’s too expensive. And this is what I think about Tesla.

With a market-cap of £465bn, Tesla is valued at twice the combined value of Ford, BMW, Volkswagen, and General Motors. That just doesn’t make sense to me. I think Tesla’s valuation has got too far ahead. Many years of growth are already priced into this business, in my view.

Scottish Mortgage: my verdict

Most of Scottish Mortgage’s investments look expensive by conventional measures. But the trust’s growth record suggests to me its managers are skilled at looking ahead and spotting businesses that can change the world.

Even so, SMT’s exposure to Tesla and other electric vehicle companies is too risky for me to accept. If big US tech stocks enter a period of correction, I think Scottish Mortgage’s share price could have a lot further to fall. I’m not comfortable buying at the moment.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon and Illumina. The Motley Fool UK owns shares of NIO Inc and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Should I sell my FTSE All-Share index fund and buy a S&P 500 tracker instead?

Harvey Jones is wondering whether now is a good time to invest more money in the S&P 500, after a…

Read more »

Investing Articles

Should I buy dirt-cheap BT shares after the recent pullback?

BT shares were on the up but now they're sliding again after the board trimmed full-year guidance. Now Harvey Jones…

Read more »

Investing Articles

Up 28%, can the easyJet share price keep rising?

The easyJet share price has gained altitude over one year but plunged over five. Is now an attractive time for…

Read more »

British Isles on nautical map
Investing Articles

Should I buy more BAE Systems shares at 1,350p?

BAE Systems shares have had a fantastic run since early 2022, yet still don't appear overvalued. Is it now time…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

7% yield and a cheap valuation! Is this one of the best shares to buy this month?

Christopher Ruane has been looking for cheap shares to buy. This one has a 7% dividend yield, so is it…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Should I buy National Grid shares for the big dividend before it’s too late?

This year's price weakness has left National Grid shares on what looks like a tempting valuation. I hope it doesn't…

Read more »

Investing Articles

There are now 5,000 ISA millionaires! See the surprising UK dividend shares they’re buying

The number of ISA millionaires is growing all the time and guess what? They're really into blue-chip dividend shares listed…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Down 38% in weeks! Time to snap up NIO stock?

NIO stock's more than doubled in value over the past five years but has been on a wild ride lately.…

Read more »