The Scottish Mortgage Investment Trust (LSE:SMT) share price has significantly retreated from its pandemic peak. Over the past two years, the value of shares in this growth-focused investment trust have dwindled from approximately £15 to just £6.50.
While attempting to capitalise on a declining stock can be dangerous, it may be worthwhile taking a closer look at Scottish Mortgage shares. Are we looking at an unmissable opportunity to gain exposure to a host of exciting growth stocks?
The discount
One of the first things investors see when they look at Scottish Mortgage stock is the discount the share price offers versus the net asset value (NAV) of the companies the fund owns.
Scottish Mortgage’s current share price reflects a discount compared to its value a year ago. But the fund is also trading at a substantial 17.7% discount relative to its NAV.
The NAV represents the per-share value of a company’s total assets minus its liabilities, divided by the total number of shares in circulation. In essence, this discount implies that the market value of the stock is below the value of its underlying assets.
Valuation issues
In some cases, investors might view this discount as an opportunity to buy into the fund at a lower price than its inherent value, potentially considering it undervalued.
However, it’s essential to remember that the reasons for a discount can vary. And it doesn’t automatically mean the fund is a good investment.
Discounts can occur for several reasons, including market sentiment, the perceived risk associated with the fund’s assets, or specific factors affecting the fund’s performance.
In this case, we can partially attribute the discount to the fact that around 25% of the fund’s investments are in privately-held companies. Because they’re unlisted, there’s no market price, and investors may be sceptical of the asset value attributed to these companies.
Take Space X for example. The company’s management values the firm at a staggering $150m, or 33 times revenue. It’s particularly expensive.
Moreover, while Scottish Mortgage has reduced its holdings in China, there’s still some exposure. This could be negatively impacting sentiment as the health of the Chinese economy has repeatedly come into question in recent months.
Undervalued
It’s certainly not easy to assess whether a fund that holds shares in dozens of companies is undervalued. Nonetheless, there are some telltale signs.
While the above accounts for some of the discount versus the NAV, 17.7% is significant. This cannot be fully attributed to the valuation concerns relating to unlisted companies.
However, more broadly I’d suggest that the valuations of the companies Scottish Mortgage invests in are much more attractive today than they were during the latter stages of the pandemic.
While Nvidia and ASML trade at considerable premiums, elsewhere in the portfolio, there are pockets of value.
I appreciate the share price has been here before, but it doesn’t happen often. I believe this could be a not-too-frequent entry point for Scottish Mortgage shares.
