A company that has rewarded shareholders handsomely over the long term is Scottish Mortgage Investment Trust (LSE: SMT). Scottish Mortgage shares have increased in value by a little over two thirds in the past five years.
More recently though, performance has been weak. In the past year, the shares lost 49% of their worth. Does that make them a possible bargain for my portfolio?
Valuing Scottish Mortgage shares
Often if a share price falls by almost half in the space of a year, it suggests that the underlying business has problems. For example, sales may have fallen or rising costs could have dented profit margins.
Things are a bit different at Scottish Mortgage. It is an investment trust, which means it pools funds from its shareholders and invests them in a variety of shares. It owns stakes in companies such as Moderna, Tesla and ASML. In fact those were its three biggest holdings at the end of last month, accounting for almost a fifth of Scottish Mortgage’s portfolio.
When the value of the underlying shares moves up or down, that should typically be broadly reflected in the price of Scottish Mortgage shares too. But that is not guaranteed. In fact, at the end of last month, the shares were selling at a 13% discount to the trust’s net asset value.
Buying at a discount
At a basic level, that means Scottish Mortgage shares are undervalued. After all, in theory, someone could buy all the shares in the trust, liquidate its assets and recoup 13% more than they paid.
In reality, things are less simple. Investment trusts often trade at a discount to their net asset value. That can be the case for decades without anyone launching a takeover bid to try and realise the underlying net asset value by selling the trust’s assets.
Still, I do think a 13% discount offers me the chance to buy into a diversified portfolio of shares at a cheaper price than if I tried to build such a portfolio myself.
Long-term investing mindset
But I am not attracted to Scottish Mortgage shares only because they are trading at a discount to their net asset value.
I also think the trust’s track record of finding and investing in promising growth companies early in their development could help it continue to unlock value for shareholders. Growth companies have fallen out of favour with some investors in the past year.
But as a long-term investor, I still see potential in businesses that can benefit from emerging consumer trends such as electric vehicles and digital commerce.
There are also risks. If tech company valuations continue to fall, that could also hurt the price of Scottish Mortgage shares. The company’s track record is not necessarily a guide to how well it will perform in future – its investment manager retired this year after many years at the helm.
However, the shares are undervalued compared to their underlying value and I also feel positive about their long-term potential. If I had spare cash at the moment, I would buy some for my portfolio.
