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Scottish Mortgage Investment Trust (LSE:SMT) shares are among the most watched on the FTSE 100. The growth-focused trust peaked during the pandemic earning much attention as tech stocks experienced a surge.
However, Scottish Mortgage shares started falling in mid-2021 and the Baillie Gifford investment trust lost its position as the UK’s most-valuable listed trust.
So down 27% over 12 months, and 43% over two years, is Scottish Mortgage a bargain growth stock?
The fall
The fund’s falling share price over the last 18 months reflects the decreasing value of the shares it holds. These shares are predominately US-listed growth stocks. However, the trust also has significant exposure to American, Chinese and unlisted shares.
For example, one of Scottish Mortgage’s biggest holdings is Tesla. The Elon Musk-run company has seen its share price tank over the past year. Currently, it’s down around 35%, despite a rally in recent weeks.
In fact, this is the case for pretty much all of the company’s major holdings. Very few have seen upward movement over the past year.
What’s next?
This year’s surge in technology stocks has surprised many investors, myself included. Don’t get me wrong, the sector was broadly looking more attractive after the collapse of 2022. But the rally has gone against many fundamental principles of investing.
Unprofitable software developers, crypto firms, meme stocks and electric vehicle makers have all rallied since the start of the year. The Nasdaq is up 17% over the first six weeks of the year (down 15% over 12 months).
The bull case is that financial conditions are much more welcoming now than they were in late 2022, with the Fed indicating that rate rises have an end in sight.
But, equally, we’re still in a high-inflation, high-interest rate environment. These are not the conditions in which growth stocks will likely flourish. Instead, it is an environment in which many companies may fail.
Picking wisely
What makes me more optimistic about Scottish Mortgage is the trust’s track record of picking the next big winner. It bought Tesla and Moderna — the latter currently represents around 10% of its holdings — before most people had heard of them.
As such, the next big winner might already be somewhere within the company’s portfolio. And while the portfolio is focused on growth, I’d suggest it is less speculative than other trusts, namely Cathie Wood’s Ark portfolios.
Scottish Mortgage focuses on company’s with strong business models and revenue generating capability. And I find that a lot more tangible than Wood’s focus on disruptive tech that also delivers a cost-cutting element to encourage quick adoption.
So would I buy more Scottish Mortgage shares at the current price? Yes. Despite the challenging macroeconomic environment, I think the long-run prospects for a well-managed fund are positive.
