Scottish Mortgage (LSE:SMT) shares had been wildly successful until late 2021. The stock soared even during the pandemic, reaching over 1,500p a share last year before tanking.
The publicly traded investment trust — which has significant exposure to American, Chinese and unlisted shares — had become renowned for picking the next big winners under star stock-picker James Anderson.
So let’s take a closer look at why the shares are trading at nearly half their 2021 highs and why I think this stock is a buy right now.
Tech sell-off
If I had bought it five years ago, I’d still be up 82% today. But that belies a very turbulent past 12 months. The stock is down 43% since September last year.
This is because the Scottish Mortgage share price reflects the value of the stocks it owns. In 2021, growth and tech stocks were clearly starting to look expensive and traded with very high multiples.
Tesla is the only one of Scottish Mortgage’s top 10 holdings not to have fallen over the past year — it is currently up 13% over 12 months.
Other top holdings, including Moderna, Tencent, Alibaba and NIO, are all down — considerably in most cases. The sell-off followed a surge in US Treasury yields, which hurt more expensive technology stocks that are valued on future growth expectations.
Outlook
I remain sceptical on the outlook for a several of Scottish Mortgage’s top stocks. Tesla has a market-cap roughly 30 times higher than its Chinese peers NIO, Li Auto and XPeng, but while its ahead of the market, I still see it as overvalued.
I also have concerns about Moderna — the fund’s top holding at 7.7%. The stock is hugely reliant on Covid-19 vaccine revenue, and that looks like that might be drying up pretty soon. It’s got a lot of cash, but it’ll be a while before it brings another non-Covid product to the market.
It’s also worth noting that the fund has a weighting towards consumer cyclicals within the tech sector. This include industries such as automotive, housing, entertainment and retail. With recession forecasts on the way, these sectors might underperform.
However, online retailers such as Amazon — which is a top 10 SMT holding — will likely outperform high street retail, while electric vehicles will likely outperform combustion cars, purely because of long-term trends towards electrification and online shopping.
Despite some of the above concerns, I’m still bullish on SMT. And that’s not because of its top 10 holdings, but primarily due to the fund’s track record of picking the next big winners before most people have heard of them.
Anderson might have left, but the fund’s modus operandi won’t have changed. The next big winner could already be somewhere within the portfolio. I’m a big fan of NIO, which is now a top 10 holdings, and there are other companies like Denali Therapeutics further down the portfolio that interest me.
Is it a bargain?
Scottish Mortgage is currently trading at a discount versus its Net Asset Value (NAV), so that can be seen as a positive. But I’m also positive on the fund’s long-term prospects, given its focus on trends in tech and electrification.
For me, at 780p, Scottish Mortgage is a bargain and I’d buy more of this stock today.
