Scottish Mortgage shares keep falling! Is it time to buy?

Scottish Mortgage shares have been in freefall for months and are down 46% since November. So, is now a good time to buy?

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Owners of Scottish Mortgage Investment Trust (LSE:SMT) shares have endured a tough year. The share price has fallen a whopping 46% since its November peak. This comes in stark contrast to the years of growth delivered by the fund. Scottish Mortgage had been one of the best-performing investment trusts over multiple years. So, with Scottish Mortgage trading at 46% of its peak, should I be looking to buy this stock?

Why did it fall?

There are a number of reasons why Scottish Mortgage shares have fallen so sharply in recent months. However, they all revolve around the fund’s heavy weighting towards growth and tech stocks. Its largest holdings include companies like Tesla, Tencent and Moderna. All of these had performed well during the pandemic. However, 2022 started with a tech sell-off and with investors increasingly looking for value rather than growth opportunities. The sell-off followed a surge in US Treasury yields, which hurt more expensive technology stocks that are valued on future growth expectations.

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More recently, amid soaring inflation and higher interest rates, investors have seen further cause to favour value over growth. For one, higher interest rates can increase the cost of borrowing and put the brakes on growth. But it’s also the case that higher inflation and interest rates incentivise investors to look for returns in the form of dividends in the near term, rather than long-term growth.

Is it in bargain territory?

I still have some issues about the fund’s valuation, which is naturally relative to the stocks in holds. Growth stocks are partially valued according to their potential and have price-to-earnings ratios substantially higher than many other stocks. But despite the 46% discount versus its November peak, I’m concerned about some of the stocks Scottish Mortgage holds.

Its biggest holding is Moderna. And that’s also a hard one to value. Having done so well during the pandemic, the future isn’t clear for the firm that brought us the lifesaving mRNA jab. Moderna is heavily reliant on Covid-related income and future revenue depends on whether governments will continue rolling out vaccines. We may also see other vaccines, like the Novavax shot, become increasingly favoured over the mRNA tech.

Other tech stocks held by the fund have demonstrated that they may struggle to continue growing. For example, Chinese tech and entertainment conglomerate Tencent, which represents nearly 5% of Scottish Mortgage’s holdings, is trading at less half of its peak, having seen a slowdown in growth.

Tesla is another one. I’ve discussed my concerns about its valuation before. At around $1trn, I think it’s hugely overvalued. Despite demonstrating impressive revenue growth in recent years, it only reported adjusted EBITDA of $11.6bn and net income of $5.5bn in 2021. Coupled with rising competition from established car manufactures, I’m concerned about its future.

Should I buy Scottish Mortgage stock?

Outgoing manager James Anderson recently said that the Scottish Mortgage strategy can involve “periods of pain”, but remained confident on future growth. The fund has traditionally been successful in picking big winners and investors will hope it will continue to do so. But for me, it’s still a no. I’m concerned about the value and prospects of some of its biggest holdings. Therefore, I won’t be buying.

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James Fox has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.

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 considered, so you should consider taking independent financial advice.

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