Are Scottish Mortgage shares now in bargain territory?

With Scottish Mortgage shares down 55% from their all-time high in June 2021, our writer asks whether now’s the time to bag himself a bargain.

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Scottish Mortgage (LSE:SMT) shares are a firm favourite with private investors. The stock regularly features in the ‘Top of the Stocks’ section of the Hargreaves Lansdown website. But the fund’s shares have fallen by 30% over the past year.

Does this mean the stock is now a bargain?

Created with Highcharts 11.4.3Scottish Mortgage Investment Trust Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Each day, Scottish Mortgage publishes the net asset value (NAV) of the fund.

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Four different figures are provided but the one most commonly used is ‘Cum[ulative] Fair NAV’. This is the market value of the investments owned, plus income received in the current financial year, less debt expressed in current prices, divided by the number of shares in issue.

By comparing this to the current share price it’s possible to determine whether the fund is fairly valued.

Yesterday, the NAV was 825p. However, the share price is currently around 670p. The fund is therefore trading at a 19% discount to its fair value.

Historically, the share price has been quite close to the NAV. The differential is now the largest it has ever been.

The stock looks like a bargain to me.

Portfolio companies

Scottish Mortgage invests primarily in high-growth companies in the technology, healthcare, and consumer goods sectors. These have recently fallen out of favour with investors. But with inflation now falling in the US, there are encouraging signs that an economic recovery is not too far away.

This can only be good news for the companies in the fund’s portfolio. At the end of March, 57% of its investments were based on the other side of the Atlantic.

At the same date, the top five holdings accounted for 29.7% of its value. And a strong investment case could be made for each one.

Moderna hopes to have developed a cancer vaccine by 2030. ASML cannot produce enough semiconductors to meet demand. Tesla achieved record deliveries in the last quarter. MercadoLibre grew its total payments volume by 60% in 2022. And SpaceX now has one fewer competitors with the recent bankruptcy of Virgin Orbit.

HoldingBusiness% of fundStock movement (5 years) (%)
ModernaVaccines8.6+745
ASMLSemiconductors8.0+245
TeslaElectric vehicles5.1+855
MercadoLibreOnline marketplace (Latin America)4.5+290
Space Exploration TechnologiesSpace exploration (Elon Musk)2.5Unlisted
As at 31 March 2023

All about the long term

Although the fund struggled in 2022, this will be of no concern to the fund’s investment manager. Baillie Gifford is only interested in the long term. It argues that a large number of clever people spend a huge amount of time focussing on the short term.

Baillie Gifford claims that it can obtain a competitive advantage by having an investment horizon of at least five years, and usually a decade or more.

This approach appears to work. Looking back over the past five financial years, the fund has recorded cumulative gains of £10bn on the value of its investments.

Financial year (31 March)20182019202020212022
Gains/(losses) on investments (£m)1,2039241,0189,265(2,421)

What do I think?

Buying Scottish Mortgage shares is a good way of achieving a diversified portfolio through the ownership of just one stock.

But critics will argue that it’s too heavily exposed to the tech sector. And that it’s difficult to accurately value (and sell) its shareholdings in unlisted companies.

However, in my opinion, Scottish Mortgage shares are currently attractively priced.

I believe the discount at which the fund’s shares trade at will soon narrow. If I’d some spare cash then I’d be happy to include them in my portfolio.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended ASML, Hargreaves Lansdown Plc, and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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