This bargain growth stock could be ready for a bull run

Our writer reckons this FTSE 100 growth stock has the potential to deliver stunning returns, but its investors need a high-risk tolerance.

| More on:
Silhouette of a bull standing on top of a landscape with the sun setting behind it

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Buying undervalued growth stocks can produce solid long-term gains. Since I have decades left in my investing journey, I’m happy to have exposure to more volatile investments in my portfolio to try to beat the market.

With signs that macroeconomic conditions could improve, I’m hopeful that one FTSE 100 growth stock I own might be gearing up for a share price rally.

Scottish Mortgage Investment Trust (LSE:SMT) is the stock I’m talking about. Here’s why I’m bullish on the fund’s growth prospects today.

A discount that might not last

Baillie Gifford‘s £13.7bn managed fund invests in a high-conviction portfolio of growth shares around the world.

It’s a one-stop shop for diversification across major stock market names. These include semiconductor giants Nvidia and ASML and e-commerce titans such as Amazon and its Latin American rival MercadoLibre. It also invests in unlisted shares like Elon Musk’s venture SpaceX.

Assessing the net asset value (NAV) of a closed-ended fund’s investments is one way to calculate how cheap its share price is. It’s not dissimilar to measuring a traditional company by its book value.

Currently, the Scottish Mortgage share price (a little above £8 today) stands at a steep 10% discount to its NAV. For most of the past decade, it’s traded at a slight premium.

However, the post-pandemic gap between the share price and underlying value of the trust’s investments has narrowed since mid-2023. It looks like time might be of the essence for investors who want to buy cheap Scottish Mortgage shares.

Source: Scottish Mortgage Investment Trust

Share price growth

Interest rate cuts are high on the agenda for major central banks across the globe. Conventional investing wisdom suggests this could boost the performance of growth stocks like those in Scottish Mortgage’s portfolio.

That’s because the appeal of fixed-income investments like bonds falls, encouraging investors to seek out higher-risk opportunities for growth.

In addition, the management team has shown determination to revive the share price back to its pandemic glory days when it briefly changed hands above £15.

A two-year share buyback programme for at least £1bn worth of shares is the largest that’s ever been conducted by a UK investment trust. I view this as a shareholder-friendly move and an important step to tackle the current discount.

Volatility’s a concern for potential investors. Scottish Mortgage isn’t a ‘steady as she goes’ investment. The possibility of big share price slumps is an intrinsic risk of chasing higher growth.

I also have concerns about the fund’s private equity exposure. This was a factor in a boardroom bust-up that hit the headlines last year. Ultimately, it led to the departure of Professor Amar Bhidé who slammed the door on the way out in his public comments.

Unlisted shares are difficult to value. It’s worrying when those closest to the action express doubts about the trust’s strategy.

I’m an optimistic shareholder

Despite the risks, I believe the Scottish Mortgage share price is primed for growth due to a shifting economic climate and the NAV discount.

I’m not a fan of every stock in the portfolio, but I like the majority of the fund’s investments. That’s good enough for me. I’ll continue to hold my shares for the long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Charlie Carman has positions in ASML, Amazon, MercadoLibre, Nvidia, and Scottish Mortgage Investment Trust. The Motley Fool UK has recommended ASML, Amazon, MercadoLibre, and Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

artificial intelligence investing algorithms
Investing Articles

BP shares are up 7% in a week but still yield 5.4% with a P/E of just 6! Time for me to buy?

Harvey Jones thought BP shares looked unmissable value when he bought them in September. Now he's wondering whether he should…

Read more »

Investing Articles

2 UK shares for value investors to consider buying

From a buying perspective, Stephen Wright thinks this looks like a good time to consider shares in cruise company Carnival…

Read more »

Investing Articles

After crashing 80% is this former stock market darling the best share to buy today?

Harvey Jones is looking for the best shares to buy in October and thinks this former growth star could finally…

Read more »

Investing Articles

Is the Stocks and Shares ISA safe?

With public spending in need of a boost, Stocks and Shares ISAs risk being altered. Does this Foolish author think…

Read more »

Investing Articles

When I look for dividend shares to buy, should I just go for the biggest yields?

The FTSE 100 is having a strong year in 2024 so far. But there are still some great yields offered…

Read more »

Investing Articles

What on earth’s going on with the IAG share price?

The IAG share price has fallen 10% over the past week, so what exactly is happening? Dr James Fox spies…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Here’s why the stock market shouldn’t care about Tesla’s delivery numbers

The market reacted badly to Tesla’s quarterly deliveries coming in below expectations, causing the stock to fall. Stephen Wright thinks…

Read more »

Young Caucasian man making doubtful face at camera
Investing For Beginners

Here’s the average return from the UK’s FTSE 100 index over the last 20 years

Many British investors have money in FTSE tracker funds. But is that a smart move given the historical returns from…

Read more »