Scottish Mortgage Investment Trust (LSE:SMT) shares tanked in 2022 so I was glad I was among those investors who’d steered clear of the stock at its peak. The growth-focused investment trust fell even faster than it gained.
But things appear to be changing, so let’s take a closer look at Scottish Mortgage’s fortunes and why I’ve now bought it.
A tough year
If I’d invested £1,000 in Scottish Mortgage shares a year ago, today I’d be left with £580. That’s not a good return at all. But the share price is actually up 10% over the past month. So, last month, my £1,000 investment would have been worth only £520.
The fund’s falling share price reflects the decreasing value of the shares it holds.
Scottish Mortgage is weighted towards growth and tech stocks while having significant exposure to American, Chinese and unlisted shares.
And as we all know, growth stocks haven’t done too well over the past year. Illumina, which is one of the trust’s biggest holdings, is down 61% over the past year. And that’s pretty indicative of the market.
The bull case
I bought Scottish Mortgage stock for my SIPP when it fell to 700p a share last month. For me, it seemed like the natural turning point for the trust despite conditions for growth stocks not really improving.
Valuations for growth stocks have become particularly attractive, in my opinion. Tesla, one of Scottish Mortgage’s largest holdings, has fallen significantly despite the business continuing to grow. It currently has a price-to-sales (P/S) ratio of around 12.5, which is massively down on where it was a year ago.
This is reflected in Scottish Mortgage’s top 10 shares. Every single top-10 stock is down over the year while their core data hasn’t necessarily suffered. The tanking share prices simply reflected the sentiment that growth stocks were becoming too expensive.
Chinese EV maker NIO is another good example of this. The share price collapsed, but it now trades with a price-to-sales ratio of just 5.5. That’s particularly cheap considering the impressive growth curve it has been on.
But Scottish Mortgage also has a great track record for picking the next big thing before we’ve even heard of it. I know that sounds pretty vague, but it’s true. The next big growth stock could already be in its portfolio.
Risks
Of course, the current environment, characterised by higher interest rates and a slowdown in the global economy, isn’t good for growth stocks.
Higher rates mean the cost of growth is likely to increase. This is because such stocks normally have to borrow heavily to fund their expansion. That said, Scottish Mortgage biotech holding Moderna has so much cash lying around from the sale of its Covid-19 vaccine, it certainly won’t need to borrow.
I’m buying Scottish Mortgage
Fees and taxes included, I’m up around 7% on Scottish Mortgage. Not a lot of people can say that right now.
But I’m a long-term investor, and I still see a lot of potential at the current price. Growth stock valuations are much more attractive right now, and I’m backing Scottish Mortgage to pick the next generation of big winners.
