For a while, the Scottish Mortgage Investment Trust (LSE: SMT) seemed to have the Midas touch. Its early investments in fast-growing tech giants like Tesla were hugely rewarding. Scottish Mortgage shares are up over 50% in the past five years.
Lately though, performance has been less impressive. Over the past year, the shares have dropped 35% in value. Indeed, they are currently just pennies away from their lowest price over the past year.
Could now be the perfect moment for me to buy the shares? I do not try to time the markets, so the question here is whether I think Scottish Mortgage shares currently trade significantly below what I think their long-term value is likely to be in coming years.
Valuation challenges
As an investment trust, the fund actually publishes its net asset value on a daily basis. Yesterday for example, it reported its net asset value was between £7.98 and £8.28 per share, depending on what specific definition is used.
With Scottish Mortgage shares closing yesterday’s market session at £6.50 apiece, they are now trading at a sizeable discount to their net asset value. Effectively, I can buy around £8 worth of assets for £6.50.
That may sound a lot like a bargain — but things are not necessarily so simple. After all, the valuation is based on the underlying valuations of the firm’s holdings. Those may not accurately reflect the long-term value of the companies in question.
Tesla, for example, has lost 47% of its value in the past year despite rising 77% so far in 2023. I do not think the actual value of the business has swung around quite so wildly. Rather, what has been moving dramatically is how investors assess it.
The significant discount to net asset value attracts me. But what I am really interested in is how I think the price of Scottish Mortgage shares compares to what I expect their long-term value to be.
Pros and cons
I am upbeat about the outlook for the trust. Its strategy of trying to find early stage growth companies that could become sizeable businesses has proven very successful in the past. I think it can do well again in the future.
For now, growth shares have lost some of their appeal for investors. That has hurt prices, leading to Scottish Mortgage shares losing value too. But as a long-term investor, I think growth shares falling out of fashion could actually be good news for the trust. It can hopefully scoop up stakes in some promising companies at attractive prices.
There are risks. Tech shares have fallen in value, but some still look expensive. With the era of easy money receding into history, tech firms are now under more pressure to make a profit. Some of them may struggle to adapt to such an environment, hurting their valuations.
I’d buy the shares
On balance though, I think Scottish Mortgage shares now look very attractively priced for a patient investor like me.
If I had spare money to invest today, I would buy some for my portfolio.
