Scottish Mortgage Investment Trust (LSE: SMT) had been a serious high flyer, peaking at 1,568p back in October 2021. But since then, the Scottish Mortgage share price has fallen by a whopping 50%.
We are, however, still looking at an 80% gain over the past five years, which beats the pants off the FTSE 100 and its 6% drop.
Comparison with the FTSE perhaps misses the point, and the US Nasdaq makes a more meaningful benchmark. That high-tech index has gained 70% over the same five years, so Scottish Mortgage is a little ahead.
Needed correction
But back at its November peak, the Scottish Mortgage share price had soared way past the Nasdaq. Both have fallen since, and the two are now far more closely aligned. It’s all down to the stocks held by Scottish Mortgage. They’re all global growth investments, many listed on the Nasdaq.
Nasdaq shares had been flying, with many up on super high price-to-earnings (P/E) ratios. But since last November, the index has plunged by 30%. I think US tech shares were overheated, and I see that as a welcome correction.
Buy Tesla?
Even after the fall, some are still on lofty valuations. Tesla, for example, is now on a forward P/E of 65. But analysts think earnings will grow strongly, and they predict a P/E of around 35 in the next two years. Is that a fair valuation, now, for one of the world’s favourite growth stocks? I think it might be.
Scottish Mortgage has Tesla shares as its second biggest holding. And some of its other holdings also look to me like they’re on attractive valuations now.
Fallen growth stocks
Moderna is the trust’s biggest holding, and its shares are down 60% over the past 12 months. P/E forecasts are erratic, standing at about 17 for 2023.
ASML, in third place, is down 36%. Fourth-placed Illumina has dipped 44%. And we see pretty much the same across most of Scottish Mortgage’s holdings.
In short, buying Scottish Mortgage shares gets us a selection of technology-based growth shares from around the world, but mostly US-listed ones on the Nasdaq index. And buying through an investment trust provides a key benefit. We get diversification from a single purchase.
If I want to buy depressed US tech stocks individually, I’d need to invest a large amount of money across a range of different ones in order to get any meaningful diversification. And I don’t want to do that. My investing strategy is mostly based on dividend income, with about 10% to 20% on growth or other one-off bargains.
Risky right now
What could go wrong?
Well, I fear we might be in for a lengthy bearish phase for growth, and for technology in particular. Recessionary eras, when inflation and interest rates are climbing, aren’t generally the times when investors go for growth strategies. No, that generally tends go alongside an optimistic mood.
But as a contrarian, I think the best time to buy tech growth shares is when they’re down. And Scottish Mortgage shares are now on a 12.7% discount to net asset value, adding an extra sweetener. I might buy some more.
