The Scottish Mortgage share price is crashing! Time to load up or run for the hills?

The Scottish Mortgage share price is far off its all-time highs. Is now the time to consider buying into this FTSE 100 growth stock?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Over the last 10 years, the Scottish Mortgage Investment Trust (LSE: SMT) has been the undoubted star of the FTSE 100. In that time period, the share price has risen over 700%. However, those heady days of growth now seem like a distant memory with the share price down 33% in just over two months. But are the shares a value trap or a bargain?

Growth vs. value stocks

The fall in Scottish Mortgage share price recently can be put down to one single factor – investor fear of rising interest rates.

When the pandemic struck, central banks slashed interest rates to 0% and pumped colossal sums of money into the economy. With such favourable conditions, a whole raft of tech-related stocks surged in price. This included many of the stocks that Scottish Mortgage invests in.

However, Scottish Mortgage not only invests in well-known names like Tesla and Nvidia. Of its portfolio, 20% is in unlisted companies. Such companies are highly speculative bets in nascent industries. In other words, they don’t make a profit.

As inflation soars and rising interest rates loom, two problems have emerged with growth stocks:

  1. Increasing cost of capital eats into the returns of companies that are highly indebted to fuel their growth ambitions
  2. The future cash flows of tech-related businesses have to be discounted back to the present day by a larger amount to offset the effect of rising inflation

In such an environment, investors are rotating out of growth and into value stocks. These stocks are historically undervalued and offer near-term growth potential. For example, look at Shell and BP. With rising oil and gas prices, they are a much safer bet for investors at the moment than speculative plays.

Is Scottish Mortgage a falling knife?

So, is the Scottish Mortgage share price an opportunity to get a great investment at a lower price, or a danger to be avoided – the proverbial falling knife? This question is best answered by considering an investor’s time frame. If I intend holding the stock for less than five years, then the downside risk outweighs any potential short-term share price bounce. I have for some time argued that the US stock market is in a bubble with many stocks reaching valuations that are completely detached from their underlying fundamentals.

I draw parallels between the unlisted companies in Scottish Mortgage with Cathy Wood’s Ark Innovation ETF. This fund, the undisputed No.1 of 2020, has completely imploded over the last year. Indeed, the highly speculative nature of this ETF reminds me of Neil Woodford’s foray into such investments. We all know how that one ended.

Of course, Scottish Mortgage does invest in high-quality businesses too. Most of these have delivered astonishing growth over the last few years. But the simple reality, is that the higher the stock price goes the lower the expected future returns become; and an ever diminishing one at that, once you factor in runaway inflation.

To my mind, the only way to make money by investing in Scottish Mortgage is holding for the long term (10+ years). That gives the investment trust time for its investment thesis to play out. One only has to look at Amazon and Tesla for evidence of that. Therefore, until the bubble deflates in US equities, I will not be investing. The risks are too great for me.

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.

Andrew Mackie 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. The Motley Fool UK has recommended Amazon and Tesla. 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.

More on Investing Articles

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »