The Scottish Mortgage Investment Trust (LSE: SMT) share price has looked cheap to me for some time.
It’s on a discount to net asset value (NAV) of close to 15%. The price has been as much as 20% below NAV before now, but 15% could still make the shares look cheap.
On Friday (15 March), we heard that “The board has now decided to make available at least £1bn for buybacks over the next two years.” Can that help boost the share price and close the discount?
Bags of cash
It seems the discount has been behind the board’s thinking.
The update told us: “Scottish Mortgage’s public and private portfolio is delivering strong operational results, evidenced in part by free cashflow from the portfolio companies having more than doubled over the past year.“
And it added that “the board now intends to take more concerted action to address the discount to net asset value.”
The big question I keep asking is, why have the trust’s shares been on such a big discount for so long in the first place?
Nasdaq up and down
It looks like it’s down to weak confidence in US Nasdaq growth stocks.
Between 2020 and 2022, the Nasdaq looked unstoppable. And the Scottish Mortgage share price climbed even faster. But then came the Nasdaq slump, and the investment trust went with it.
Today, the tech index has regained its strength, and has reached even higher peaks. But Scottish Mortgage hasn’t gone with it. Why not?
I think we need to look at some of the trust’s top holdings.
Tech growth stocks
The top two are semiconductor giants ASML and Nvidia. ASML is on a forecast price-to-earnings (P/E) ratio of 47, while Nvidia is at 38.
Tesla is also in the top 10, on a forward P/E of 59.
At the other end, Moderna is well down from its Covid-inspired excesses, and expected to lose money in the next three years. Moderna stock has fallen 78% from its 2021 peak.
Another bubble?
We’re mostly looking at tech stocks on very high valuations again, with the occasional loser that was crazily overvalued in the previous bubble.
Fears are growing that US stock markets are overheating again. Both the Nasdaq and the S&P 500 are at record highs. And that’s in risky tough economic times.
What about in an investment trust based in the UK, where folk tend to be more conservative than bullish US investors? Well, I guess a good few expect to see new US stock market falls.
Buyback
Will this £1bn share buyback make any difference to the Scottish Mortgage share price, and to the discount?
It’s about 10% of the trust’s total market cap. So when it’s complete, we should see earnings spread across 10% fewer shares and earnings per share (EPS) boosted. I’d expect that to lift the share price, which has risen almost 3% on Friday morning.
On the discount front, I’m not so sure. While EPS should rise, so should the NAV.
But I do still find the Scottish Mortgage discount tempting. I might buy more to hold for the long term.
