Scottish Mortgage Investment Trust (LSE: SMT) aims to identify exceptional growth companies at an early stage then profit from their meteoric rise in value.
Tesla is probably the most high-profile example of this strategy working in recent years. The carmaker’s surging stock has contributed to a 288% rise in Scottish Mortgage shares over the last decade.
However, Elon Musk’s firm is worth $578bn today, so I think it’s safe to assume that Tesla stock won’t rise by a similar amount again.
Therefore I think it’s worth considering which companies in the trust’s portfolio could also deliver exceptional share price returns in future.
Possibilities
The most likely candidates are to be found at the top of the portfolio, as these are presumably the stocks in which the managers have the greatest conviction.
Today, the joint top holdings are semiconductor equipment supplier ASML and mRNA vaccine developer Moderna. I think both are good candidates to rise much higher in value in the years ahead. The growth of the semiconductor industry depends on ASML’s lithography machines to print cutting-edge chips.
Meanwhile, Moderna now has 30 vaccines in clinical trials for a number of diseases. And it has the wherewithal and ambition to fund further potential treatments, including for multiple types of cancer.
As such, the trust’s managers believe Moderna could one day become the first trillion dollar healthcare company.
Another candidate to drive Scottish Mortgage shares much higher in future is SpaceX. Its reusable rockets have reduced launch costs by 95% from the space shuttle days. It is a pioneering leader in an untapped global space industry.
Scottish Mortgage is also invested in chipmaker Nvidia, which looks set to become the latest $1trn firm.
Luxury goods
One stock that has performed disappointingly is Gucci owner Kering. The share price is up just 3.75% over the last five years.
This compares poorly with rival French luxury conglomerate LVMH, whose shares are up 172% in the same period. That has seen it become the largest company by market cap in Europe. So it seems Scottish Mortgage backed the wrong horse here.
That said, the performance of its holding in Ferrari has been exceptional. The stock has risen 45.5% over the last year, as demand for the firm’s supercars from its ultra-wealthy customers remains almost insatiable.
While I expect Ferrari stock to outperform long term, it’s unlikely to produce Tesla-esque returns.
Unlikely candidate
Gene-sequencing giant Illumina has been a core holding in the portfolio for many years. The company has a market-leading position in a genomics industry that is poised for big growth.
However, it has recently become embroiled in battles with regulators over blocked acquisitions. Meanwhile, growth has stalled and margins have deteriorated.
Consequently, the trust has reduced its position in Illumina. It now makes up just 2.2% of assets, down from over 8% last year.
Meanwhile, Alibaba has been sold completely, meaning portfolio allocation to China is now 13.2%, down from 15.8% last year. This exposure to Chinese stocks remains a concern for me, as regulatory and geopolitical risks persist.
Nevertheless, I recently added to my long-term holding in Scottish Mortgage. The trust gives me low-cost access to many world-changing companies in both public and private markets. I remain very bullish on the future.
