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Scottish Mortgage (LSE: SMT) shares have taken a beating over the last 18 months, and the pain isn’t over yet. During 2022, they lost half their value. This year they’re down another 9.52%. Things look so bleak, I’m wondering if now may be the perfect time to buy them.
For a contrarian investor like me, Scottish Mortgage Investment Trust looks a no-brainer buy. Before its meltdown, it routinely traded at a premium to its underlying net asset value. Today, it’s on sale at a whopping 22.4% discount. So I should buy, right? Well, it’s not that simple.
The Scottish tech play
There’s a growing controversy about the state of those assets, many of which are “late-stage private companies”, according to managers Tom Slater and Lawrence Burns. They deny investing in start-ups, but critics say many of its holdings aren’t far off that definition, cranking up the risk factor. Some 28.6% of the portfolio is now invested in privately held assets, close to its 30% ceiling. Again, that spells unknowable risk to me.
Either way, Scottish Mortgage’s performance is likely to remain volatile. It made a big winning bet on Tesla, buying its shares in 2013. By 2021, its holdings were worth a staggering $30bn more.
That hugely successful trade has distorted both performance and investor perceptions. It helped push Scottish Mortgage into the FTSE 100 in 2017, giving this previously obscure trust mass market appeal, for better or worse.
Shoot-the-lights-out stocks like Tesla are few and far between, and identifying them early isn’t easy either. Investors who buy Scottish Mortgage today in the hope it will blithely return to former glories are placing a big bet.
Tesla is still its fourth-biggest holding at 4.3% of the portfolio, which is paying off today, with the electric car maker up a mighty 66.65% in 2023.
Another top 10 holding, Nvidia, has rocketed a staggering 118.4% year-to-date, while it’s number one holding ASML is up 24.47%. Naturally, others haven’t done as well, but Scottish Mortgage still has its fair share of winners.
Slater and Burns are under pressure after last year’s meltdown. which saw it go from being the best-performing UK trust to one of the worst. Soaring inflation and interest rates knocked the stuffing out of the tech sector in 2022.
It’s cheap but also risky
Yet this year’s tech recovery – another top 10 holding, Amazon, is up 35.46% – hasn’t translated into positive performance for the investment trust as a whole. Its portfolio must contain a fair number of underperformers too.
However, I believe Scottish Mortgage will benefit from the long-awaited interest rate ‘pivot’, when the US Federal Reserve and other banks start cutting interest rates rather than hiking them. That will improve sentiment across the board, and I’m tempted to buy Scottish Mortgage today, before that moment arrives.
Scottish Mortgage may struggle to pull off another Tesla or two, but I think it’s so cheap that some recovery is likely, for investors who take a long-term view.
I don’t have much exposure to the higher-risk end of the tech market, and this low-cost investment trust would give me it. There’s no point waiting for a dip. That’s already happened. My buying opportunity is here today. I’d better find the cash.
