Throughout 2020, the star of the FTSE 100 was the Scottish Mortgage Investment Trust (LSE:SMT). It more-than-doubled in value during the calendar year. With new retail investors also increasingly focused on high returns, it became a really popular pandemic stock to own. However, over the past year, Scottish Mortgage shares are down by 45%. Is this a dip I should buy, or fundamental weakness I should avoid?
To understand the rise and (partial) fall of the stock, I need to understand what it does. The investment trust is run by Baillie Gifford, a professional money manager. It buys and sell different stocks as deemed appropriate. The managers have a fairly free remit on the type of stocks and the geographical location of shares.
The total value of the stocks at any point in time can be referred to as the net asset value (NAV). The Scottish Mortgage share price should reflect the NAV price. Given the fact that the value isn’t available on a daily basis, it can cause the share price to trade at a discount or premium temporarily.
Understanding this helps to explain why the performance was so strong in 2020 but weak in the past year. The stock market as a whole performed well during 2020, particularly in the US, where the trust owned a large selection of stocks.
So far this year, it’s been a completely different story. Stock markets have been falling, with underperformers including big tech. The trust owns shares such as Tesla, Amazon and Nvidia, which has dragged performance down.
Finding value in Scottish Mortgage shares
Given the fairly unique nature of how the investment trust works, I have to use different metrics to see if the stock is undervalued or not.
One way I can assess this is by looking at the discount or premium versus the NAV. Some investors are fearful or greedy, and this can mean the share price is disconnected from the real value of the stocks in the trust. I think we’re seeing this at the moment. The share price is currently at a 13% discount based on the latest NAV figures.
I know these figures aren’t up to date by the second, but it does suggest to me that the stock has been oversold.
The other way I can find value is by looking at the top holdings and deciding if they’re undervalued. I think that the tech sector is starting to look much better value. I’m also a fan of Asian companies such as Alibaba and Tencent, as I think Asia is going to drive future global economic growth.
As a risk, Tesla is part of the portfolio and I’m still not a fan of the EV maker. I think the business could struggle in the future. This is also the problem with investment trusts. I don’t have the ability to influence where the managers invest and this isn’t something that I can change.
That said, I think that Scottish Mortgage shares are good value and so am looking to buy now to take advantage of this.