FTSE 100 stalwart Scottish Mortgage Investment Trust (LSE: SMT) had been on my watchlist for a while so last month I had some investable cash and snapped up some shares.
I owned the stock a few years back but after rising over 120% in 18 months between January 2020 and July 2021, I decided to offload my shares and pocket the profit. Since then, however, its share price has retreated and that grabbed my attention.
There are a few factors that tempted me to add it to my holdings once again. I’m also incredibly keen to start building up my position. With any investable cash I have, I plan to purchase more shares this month. I reckon investors should consider buying the stock too. Let me explain why.
Valuation
The main factor is that Scottish Mortgage looks undervalued.
First, its share price looks cheap. It’s trading 42% lower than its all-time high of £15.28, which it reached back in November 2021. With its shares currently trading at £8.84, that looks like good value.
This is reinforced when considering that right now it trades at a 9.4% discount to its net asset value (NAV). Looking at whether a fund is trading at a discount or premium to its NAV is one of the most common ways to value it. When a trust is discounted compared to its NAV, it essentially means investors can gain access to the companies it owns for cheaper than their market rate.
Gaining momentum
Of course, its cheap price coupled with a Footsie rally means that the stock has been gaining momentum recently. Year to date it’s up 12.5%. In the last year, it has climbed 39.1%. Scottish Mortgage shares aren’t as cheap as they have been. But I’m still eager to buy more.
Artificial intelligence
What’s more, I feel that its share price has the potential to keep rising from here. One reason I think this is because of its focus on the artificial intelligence (AI) sector. It owns top names in the industry such as Nvidia, ASML, and Tesla. The AI market is predicted to keep booming in the years to come.
The risks
That said, there’s no such thing as a free lunch. Investing in Scottish Mortgage comes with risks.
One is that while it’s trading at that discount, over a quarter of the fund’s holdings are private companies. Valuing these companies can often be a challenge. So, there’s that to consider.
The trust’s performance can also be very volatile. That’s due to the focus on areas such as AI as well as its heavy weighting to growth stocks. While these stocks can produce mouthwatering returns, on the other hand, share prices in these companies can experience massive swings.
I’m buying
But do I back Scottish Mortgage to excel over the long run? I’d say so.
That’s what’s most important to me. And it seems that’s also the case for the trust’s management, which looks to maximise returns over the long term. At its cheap price, I’ll be picking up more shares in the weeks ahead.
