Buying high-quality shares while they’re down significantly from their all-time highs can be a lucrative exercise. With that in mind, here’s one out-of-favour stock to buy in September. At least, that’s what I’ll be doing.
A rough patch
Innovation-driven Scottish Mortgage Investment Trust (LSE: SMT) has endured a tough time recently. Since surging to an all-time high of £15.28 in late 2021, the share price has surrendered over 50% of its value. Today, it trades for just £6.87.
Why did this dramatic fall happen? Well, the main reason was that at the end of 2021 central banks really started to sound the alarm on inflation. Consequently, interest rates were raised repeatedly to help tame rapidly rising prices.
This proved to have a significant impact on the FTSE 100 trust, as the growth companies it invests in are generally high on promise. That is, most of their cash flows are set to be realised (if ever) in the years ahead. This made them more susceptible to being discounted in response to changes in interest rates.
After all, Scottish Mortgage seeks out “companies pursuing big opportunities and investing in projects with uncertain payoffs.” Unfortunately, investors have become more cautious about stocks with “uncertain payoffs“.
That’s especially true of unlisted companies, which make up just over a quarter of the fund’s assets. While younger private enterprises generally have a longer runway of growth, they can be notoriously tricky to value with an accuracy.
This is a big reason why Scottish Mortgage shares are currently trading at a 19% discount to net asset value (NAV).
Portfolio progression
Despite these challenges, I’m encouraged with the progress being made at most of the companies in the portfolio. Here are some recent examples worth highlighting:
- Chip designer Nvidia just reported AI-powered earnings that completely demolished Wall Street estimates. Its Q2 adjusted net income rose 422% year on year.
- Moderna has shown that its mRNA technology could be used to create effective personalised cancer vaccines. The managers think this technology could revolutionise global healthcare.
- SpaceX has launched 61 rockets so far in 2023, already more than it did all last year (60). Its satellite business Starlink now has over 1.5m subscribers.
- Upside Foods has received regulatory approval to sell cultivated meat in the US. Unlike plant-based alternatives, this is actual meat grown from real animal cells, involving no animal slaughter.
Progress over policy
Ultimately, I think it will be the long-term earnings progress (or not) of its holdings that determine where the trust’s shares end up. Macroeconomic issues are unlikely to hold back technological progress.
Remember, UK interest rates hit 17% in the 1970s as the world grappled with war, an energy crisis and cost-of-living hardships. Global stock markets were extremely volatile. Sound familiar?
Yet during that decade, Microsoft, Oracle and Apple were all founded, following Intel in 1968. And the global mega-trend of information technology and software proved far more powerful and lasting than 1970s central bank policy.
I’m confident it will prove to be the case again with huge investing themes like space exploration, mRNA-based medicines and carbon capture. If so, then Scottish Mortgage stock could prove to be the best bargain on the FTSE 100 today.
That’s why I intend to double down on the shares in the coming weeks.
