Scottish Mortgage Investment Trust (LSE:SMT) shares have disappointed investors over the past year. But management recently argued that periods of poor performance were inevitable.
This underperformance has surprised many. The fund soared during the pandemic, but its stock has slumped since then.
So what the investment case for Scottish Mortgage shares now? Let’s take a closer look.
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£1 for 78p
Scottish Mortgage shares currently trade at a 22% discount versus their net asset value (NAV). So what does this mean?
A discount to NAV occurs when the market trading price is lower than the most recent NAV. The latest NAV was provided on 17 May, and valued shares at 805p. However, the current estimated NAV on the Hargreaves Lansdown platform is 815.9p.
The current share price — 651p — represents a 22% discount versus the NAV.
A discount tends to suggest the market is generally bearish on the investments in the fund, or the fund’s capacity to generate returns going forward.
As such, every pound worth of stock at the current NAV would cost me just 78p.
Cheap for a reason?
Scottish Mortgage shares reflect the value of the trust’s holdings. It’s a publicly traded investment trust, which focuses on growth prospects, with many holdings in the US and China. Around 28% of the fund is in privately held companies.
The trust’s five biggest holdings are Moderna, Illumina, ASML Holding, Tesla and MercadoLibre. Collectively, these stocks represent around 25% of the portfolio. Scottish Mortgage has owned many of these stocks prior to them becoming the giants they are today.
But looking forward, investor bearishness indicated by the sizeable discount versus the NAV, suggests downward pressure on the trust’s holdings. And this reflects broader sentiment about the direction of US-listed stocks this year.
However, there’s some optimism around the tech-focus investments held by Scottish Mortgage. Analysts have forecast a strong second half of 2023 for the Nasdaq — where many of these growth stocks are listed — as advertising demand rebounds, costs decrease, and profit margins improve.
Be greedy
Legendary investor Warren Buffett famously said: “Be fearful when others are greedy, and greedy when others are fearful”.
Right now, as indicated by the NAV, investors are fearful that Scottish Mortgage shares could continue to underperform. It’s worth highlighting that the stock is down around 60% from its pandemic-era highs and it’s fall was well-publicised.
But on this occasion it may pay to be greedy, and snap up Scottish Mortgage shares while they’re trading at the current discount. Building on this, Scottish Mortgage also has a reputation for picking the next big winners before we’ve even heard of them.
I already hold shares of Scottish Mortgage in my SIPP (self invested personal pension). And at the current price, I’m looking to top up and lower my average buying price.
