I have been watching the once mighty Scottish Mortgage (LSE: SMT) share price as it keeps heading down. At some points in the past year, Scottish Mortgage shares traded for over £15 each. They have fallen 45% in a year and now cost close to £7 per share.
At that price, is the stock a possible bargain for my portfolio?
How to value Scottish Mortgage shares
Before getting into the potential value of the shares, it is necessary to understand exactly what the business is. Scottish Mortgage is what is known as an investment trust. Such trusts pool money from lots of investors. They then invest it – in this case, mostly in shares of listed companies and also some private ones.
That means the value of an investment trust is typically driven by a couple of different factors. An important one is the value of its underlying investments. Scottish Mortgage owns a lot of tech shares. Many have fallen in the past year, which helps explain why its shares have also dropped in value.
A second consideration when valuing such a business is investor confidence in its fund managers’ ability. That is sometimes reflected in the discount or premium at which its shares sell, compared to the underlying value of its assets.
Currently, the shares are trading at around a 17% discount to the estimated net asset value per share. That is only an estimate. As Scottish Mortgage owns shares in some private companies like SpaceX that lack a published share price, it is hard to make a precise valuation. But a 17% discount suggests the market is not building any premium into the share price to reflect positive expectations about future management performance.
Why I see value
That discount looks too big to me. Scottish Mortgage has a long history of skilled stock-picking. That helps explain its success in the past few years until the recent tech market fall. There has been a change of fund managers this year. But I think that will not necessarily change the trust’s tried and tested approach to finding great growth stories in their early stages.
On top of that, I think the company’s collection of tech holdings could yet recover some of the value lost in recent months. That may push up the price of Scottish Mortgage shares. However, there is a risk that the opposite could also happen. Tech shares have lost a lot of value already — but they could keep going south from here. Further market volatility might push the Scottish Mortgage share price even lower from here.
My next move
As a long-term investor, I am not focussed on what might happen next in the stock market. Instead, my approach to these shares is driven by what I see as its potential in the years to come. The company has a diverse portfolio including positions in dozens of tech firms. It also has a proven ability to spot promising businesses at an early stage. That could hopefully help it make rewarding investments in future.
For those reasons, I think the share price is a bargain at £7. I would consider buying some shares for my portfolio.
