Scottish Mortgage Investment Trust (LSE: SMT) shares have fallen more than 20% over the past 12 months. But they’re still up 40% over five years.
I rate Scottish Mortgage as a buy, and right now the shares look extra cheap. But I don’t know how long that might last.
Three-year low
The shares had looked like they were ticking up. But the Silicon Valley Bank collapse has sent them tumbling again. We’re now looking at the lowest price for three years.
Why’s it so important? Well, it’s Silicon Valley. It’s the US technology heartland. And Scottish Mortgage invests heavily in US technology stocks.
Valuation
I want to talk about investment trust valuation. And why I think the Scottish Mortgage valuation, in particular, is so low that I wonder if the bargain days can last.
I’ve been buying investment trusts for years. And one of the key things I keep my eye on is the premium, or the discount. What are those, you might ask?
Well, an investment trust invests in various assets for its shareholders. In this case, it’s those high-tech growth stocks. So when I buy a share in a trust, I’m really buying some of those underlying investments.
Assets
There’s a thing called net asset value (NAV). That tells me the value of the underlying assets that I own indirectly through my Scottish Mortgage shares. If the shares are above that value, we say they’re trading at a premium.
But if the shares are cheaper than the asset value, then we say they’re on a discount. Scottish Mortgage shares are trading on a discount. And right now, it’s a big one.
In the latest panic, Scottish Mortgage is valued at 17% less than the shares it holds. That’s like being able to buy pound coins for 83p each.
Real risk
It’s important that we don’t overlook the real risk here. US tech stocks have been falling for some time. And some of them were, in my view, horribly overpriced to start with.
Tesla, for example, is on a price-to-earnings (P/E) ratio of around 50. But a couple of years ago it was over 650.
The same has happened to a number of others held by Scottish Mortgage. They’ve fallen, but even now they’re not no-brainer cheap. The main risk I see is that the tech stock correction isn’t over, and there could be more pain to come.
Panic!
But I love this latest panic. It scares people, they sell their shares, and that makes them cheaper for me. The fear is surely overdone, and I don’t see a bank crash coming (I didn’t see the last one coming either, but let’s gloss over that).
Will there be a further tech stock meltdown? I don’t think so. Not when we’re talking about global giants like Moderna, ASML, Illumina, NVIDIA… all Scottish Mortgage holdings.
And when the markets realise the sky isn’t falling, they might just start buying back in. A Scottish Mortgage top-up is high on my wanted list.
