I called the Scottish Mortgage share price completely wrong! Should I now buy?

The Scottish Mortgage share price has soared in 2020. G A Chester reviews his negative analysis of the stock, and gives his current view.

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Nobody gets every investment call right. One I’ve got spectacularly wrong is FTSE 100 stock Scottish Mortgage Investment Trust (LSE: SMT). I’ll tell you exactly how wrong shortly. For the moment, it’s enough to say that the Scottish Mortgage share price recently hit a new all-time high, making a mockery of my past negative views at much lower levels!

Here, I’ll discuss SMT’s performance, review the reasons I was negative on it, and give you my current view.

The soaring Scottish Mortgage share price

SMT’s shares made a new high of £10.85 earlier this month, and remain above the 10 quid mark today. At the time of my most recent bearish article (June), the shares were £7.55.

Worse still, when I first wrote negatively about the stock (last December), the shares were just £5.22. With the price having precisely doubled at yesterday’s close of £10.44, you could say my call was literally 100% wrong!

Furthermore, the strong performance of SMT’s shares is no flash in the pan. They’ve gained 294% over five years and 707% over 10 years. In fact, SMT is the top-performing investment trust in the global sector.

Dangerously overvalued?

SMT’s portfolio is dominated by ‘disruptive’ businesses built on digital and other new technologies. Its top four holdings are Tesla (12% weighting), Amazon (7.9%), Alibaba (6.1%) and Tencent (5.5%). Elsewhere in the portfolio, there’s a number of familiar disruptive names, including Netflix, Spotify and Zoom.

My issue with SMT has been less about the businesses it holds, more about the valuations the market has pushed them up to.

I’ve previously noted SMT holds “some of the most richly-rated companies in what is — by historical standards — a richly-rated market.” For example, the average price/sales ratio of SMT’s top holdings was more than double that of the NASDAQ index — itself one of the world’s most expensively-valued markets.

I also noted no investment trust in the history of the FTSE 100 had reached a ranking anywhere near as high as SMT’s. And I saw this as another indication that its underlying holdings could be dangerously overvalued.

The Scottish Mortgage share price today

Since my last article, SMT’s share price has advanced a further 38%. This reflects further increases in the valuation of its underlying holdings.

We’ve also had the trust’s half-year report. During the six months to 30 September, SMT exited its position in Facebook. It also said it “made the first reduction to our Amazon holding that was not driven by diversification concerns.” The managers believe Amazon’s current valuation “makes the path to large future returns more challenging.”

I find it encouraging SMT is recycling some of the cash from its highly-valued heavyweight winners into “the growing number of opportunities we have to invest in digital businesses of scale beyond the giant western platforms.” However, I think many of these businesses also have gravity-defying valuations.

It’s one of the features of investing that even if you’re right about the overvaluation of certain assets, the price the market’s willing to pay for them can keep rising for a considerable time. As respected British economist John Maynard Keynes said: “Markets can remain irrational longer than you can remain solvent.”

However, with many of SMT’s underlying holdings hideously overvalued (in my view), I’m sticking to my fundamental value principles. As such, I remain inclined to avoid the stock. No sniggering, please, from growth and momentum investors sitting on big gains!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool UK owns shares of and has recommended Alibaba Group Holding Ltd., Amazon, Facebook, Netflix, Tesla, and Zoom Video Communications and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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