Scottish Mortgage Investment Trust (LSE:SMT) shares are among the worst performing on the FTSE 100 over the past 12 months. The publicly traded investment trust focuses heavily on growth and tech stocks — an area of the market that has underperformed since the pandemic.
Today, Scottish Mortgage is trading around £7.40, down 50% over 12 months. So is now the time to buy?
Valuation
As a publicly traded investment trust, the Scottish Mortgage share price reflects the value of the stock it owns. The Baillie Gifford-managed trust invests in growth and tech stocks, notably those listed in the US and China, as well as unlisted companies. It owns shares in a number of household names, including biotech Moderna, EV maker Tesla, and Elon Musk’s SpaceX.
Scottish Mortgage had been one of the most successful UK funds in recent years, surging during the pandemic as tech stocks boomed. However, earlier in 2022, it lost its position as the UK’s largest investment trust in market-cap terms.
Its five biggest holdings are Moderna, Illumina, ASML Holding, Tesla and Tencent. Collectively, these five stocks represent 25% of the portfolio — less than they did earlier in the year.
Downward pressure
Some of the big names in soft tech have recently announced disappointing results as worsening economic conditions. Similar to the dot com crash, companies with huge potential, but not necessarily making a lot of money, have suffered.
Amazon and Meta are both down nearly 25% over the past month (Amazon, -50% over 12 months, Meta -69% over 12 months) — the latter is not owned by Scottish Mortgage, but concerns about Meta’s performance spooked the market.
The global economic slowdown is also impacting hard tech. Tesla stock is down 20% over the past month (-50% over the year), while Chinese peer NIO — the trust’s seventh largest holding — is down 30% over the month (-76% over the year).
It’s also worth noting that the economic environment is broadly difficult for growth stocks, with higher interest rates increasing the cost of borrowing and economic activity poised to contract.
Should I buy?
Scottish Mortgage invests in overseas markets so the value of investments can be affected by changes in currency exchange rates. Right now, it’s likely the Scottish Mortgage share price is being sustained by the pound’s weakness.
But the weakness of the pound, in my opinion, isn’t going to last forever. So that’s certainly one thing to bear in mind. In fact, I’ve largely held off buying dollar-denominated stocks in recent months due to the strength of the dollar — an appreciating pound could wipe out all my gains.
However, valuation metrics are becoming much more attractive across the board. A year ago, I wouldn’t touch many growth stocks as companies were trading with multiples many times above earnings or sales.
And this is why I’m buying more Scottish Mortgage stock right now. I appreciate we’re entering a challenging period, but I feel that valuations are already reflecting these issues. Many of Scottish Mortgage’s holdings have already seen 75% wiped off their valuations, but the fundamentals remain positive for growth.
I also back the trust’s ability to pick the next big winner. They bought stocks like Tesla and Moderna years before they were household names.
