Scottish Mortgage Investment Trust (LSE: SMT) shares have fallen in 2023. But since the start of May, they’ve crept back a bit.
It’s been erratic, but they’re up 11% since a 52-week low. Still, the price is down 57% since the heady heights of 2021.
New bull run
I expect Scottish Mortgage to get back to a new bull run. I’m just not so sure that this is the start of it.
Crucially, the discount to net asset value (NAV) remains high. When investors are bearish on an investment trust, they’ll often push the price of a share down below the value of its underlying assets.
The Scottish Mortgage discount has been stuck at around 20% for months now, which is a pretty big gap in investment trust terms.
And as of 23 August, it stood at 19.3%. That doesn’t suggest a bullish mood to me.
It seems it’s down to fears of US stock markets wobbles. Still, the tech-heavy Nasdaq, where most of the trust’s holdings are listed, has actually gained ground in 2023.
While Scottish Mortgage shares are down 6.7% year-to-date, at the time of writing, the Nasdaq is up 31%.
So fears of a new US stock market crash? Yes, they do seem to be going round. I think there’s a big chance of a US correction too, but the signs point to a different index.
Right now, the broader S&P 500 is on a price-to-earnings (P/E) ratio of 25. Over in the UK, the FTSE 100 P/E is less than half that, at 11.
Crash to come?
The thing is though, I don’t think the Nasdaq looks overvalued. It’s at a very similar level to the S&P 500, with a P/E 24.
That’s for an index holding most of the biggest growth stocks in the world. What about individual stocks?
Are Tesla shares overvalued on a forecast P/E of 80? Well, yes, they might be. But profit expectations are so strong it would drop to less than half that on 2025 forecasts. So maybe not.
ASML, the trust’s biggest holding, is on a PE of 32. But forecasts see that falling to 21 in a couple of years. And I just don’t see that as over-stretched.
Never mind valuation
Generally, I don’t think markets care too much about fundamental valuations. At least not for high-flying growth stocks.
And there does seem to be a value inversion here, between the S&P and Nasdaq.
But let’s think about that possible correction again. If it happens, I fully expect Nasdaq stocks to be knocked back again. Even if, individually, they might not deserve it.
Is there still time to buy Scottish Mortgage shares before the next bull market? I think so, and I reckon the bargain days could go on for some time yet.
So my approach is to ignore all this, forget about US market shenanigans, and just look at the Scottish Mortgage valuation.
I still think its too cheap, and buying more is very much on my horizon. And I don’t really care about the short-term sentiment risk.