There’s been a lot going on at Scottish Mortgage Investment Trust (LSE: SMT) lately and the shares have real momentum. In fact, the FTSE 100 stock is now up 37% in just under five months.
Yet I reckon the share price could carry on climbing. Here’s why.
There’s an activist investor involved
On 21 March, it was reported that Elliott Investment Management had disclosed a 5% stake in Scottish Mortgage. This is an activist US hedge fund with a reputation for ruffling feathers if need be to extract shareholder value from its investments.
Elliott has been building this position for a while and it’s now worth some £607m. As far as I can tell, this would make it the largest individual shareholder in the investment trust.
Now, we don’t know for sure what its intentions are yet. But I think it’s likely there will be a few suggestions put to Scottish Mortgage’s board on how to improve the share price performance.
Sentiment has already been improving around the stock, and this might continue now Elliott is involved.
A gigantic £1bn+ share buyback
The second reason relates to the board’s decision to make available at least £1bn for share buybacks over the next two years. This makes it the largest ever investment trust buyback programme in absolute terms.
Justin Dowley, chair of Scottish Mortgage, said in a statement: “The board and managers have been actively considering increasing the level of buybacks over the past two years.”
How is the trust going to fund this? That was my first thought when I heard this news.
I mean, it didn’t have that sort of cash at hand last time I checked. And its top holdings don’t exactly pay big dividends. Nvidia‘s yield is 0.01% while Tesla and Amazon have never paid one.
Debt? I doubt it in today’s higher rate environment. Besides, the trust is already 13% geared.
So that leaves the sale of stocks. What could it trim back or exit? Well, Nvidia has to be a strong contender for profit-taking after a mind-boggling 2,000% rise in five years.
The trust first bought the AI stock in July 2016 and it has surged around 65 times in value since then. The holding will be worth over £1bn today, assuming it hasn’t been reduced already.
Or perhaps loss-making NIO could be sacrificed? Or Tencent, whose shares have gone nowhere for years. There are a few candidates.
The main reason for buybacks is to try and narrow the discount between the share price and the fund’s net asset value. That has shrunk from 14% in mid-February to just 7.9% today. Buybacks may narrow it further.
IPO market
Finally, there are signs the frozen IPO market might finally be thawing. For example, shares of social media site Reddit closed 48% higher on its trading debut recently.
That bullish market response may persuade more companies that the public waters are safe to swim in.
And we could see portfolio holding Northvolt list this year. The Swedish lithium-ion battery maker has already received orders of over $55bn from the likes of BMW, Volvo and Volkswagen Group.
I reckon this trio of catalysts — activist investor, buybacks and potential IPOs — could mean the shares climb further this year.
