I think Mr Market is offering long-term investors a handful of gifts at the moment. But it’s unlikely to stay that way for long. So I’d snap up these two FTSE 100 stocks before he withdraws his offer.
Gift number one
Like Tarzan, the shares of Scottish Mortgage Investment Trust (LSE: SMT) have been swinging lower for about 18 months now. They’re down to 670p from the 1,550p price they reached at the end of October 2021. The stock is now at a three-year low.
The reason is that the bad news keeps coming for Scottish Mortgage shareholders. A brutal sell-off of tech stocks starting in late 2021, fueled by rising interest rates, was compounded this week by the dramatic collapse of Silicon Valley Bank.
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This lender held money for some 10,000 start-ups and small businesses. The fall-out from this is a risk for Scottish Mortgage’s portfolio, as it has around 52 private companies, many of them start-ups in its portfolio. We don’t know whether they could encounter cash flow difficulties as a result.
However, as of January, half of the trust’s assets are in quoted companies with net cash positions, while 48% are profitable. Of the 22% that are unprofitable, 8% of those generated positive free cash flow.
On the private side, large holdings such as TikTok’s owner ByteDance and SpaceX are unlikely to encounter cash flow problems. They’d be the largest and third-largest companies, respectively, by market cap if they were to list on the FTSE 100 today. At least according to the latest private market valuations.
Plus, the trust’s shares now trade at a massive 16% discount to the net asset value (NAV) of the portfolio. Perhaps Mr Market is offering me an early-Easter present here — although I’m aware of the very real risk that the share price may not rise as I anticipate — and I’ll be accepting it very soon.
Gift number two
Shares in insurance and asset manager Legal & General (LSE: LGEN) took a big tumble back in September after the mini-budget debacle. While the stock recovered quickly, it does highlight how volatile L&G shares can be when macroeconomic problems flare up.
Like recent days, for example, with collapsing US banks sending the stock down 8%. We don’t yet know to what extent the firm is affected, if at all.
In the meantime, there’s a forecast dividend yield of 8.3% to compensate for this risk. And operationally, the company remains in tip-top shape, according to last year’s performance.
- Operating profit of £2.52bn, up 12% year on year
- Record profit after tax of £2.29bn, up 12% over 2021
- Earnings per share (EPS) of 38.33p, up 12% from 34.19p
- Solvency II coverage ratio of 236%, up from 187%
The solvency II ratio measures an insurance company’s financial ability to withstand risks such as falling asset prices or increased liabilities. That figure of 236% is high, suggesting it’ll easily weather this latest storm.
Plus, 37% of its £1.2trn of assets under management is now international. That provides diversification and increasing exposure to global development and growth.
One area where profits fell last year was in its investment management division, where market moves impacted portfolio values. However, I’d expect this to reverse pretty sharpish once markets settle and regain their upwards trajectory.
At 243p a share, despite the possibility that the ‘story’ doesn’t play out as I believe it can and the share price won’t run up accordingly, I think Mr Market is offering me another long-term gift that I’d be foolish (lowercase f) to turn down.
