It’s been a volatile year for Scottish Mortgage Investment Trust (LSE: SMT). Despite its shares being up 4.5% year to date, that doesn’t paint the full picture.
The stock has experienced peaks and troughs this year. The most recent was a 5% dip at the end of August.
But now sitting at £8.23, I think it could be time for investors to consider buying the trust. Here are two reasons why.
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Trading at a discount
Reason number one is that it looks cheap, even after rising this year. I say that because it’s trading at a discount.
By that, I mean the market price of the trust’s shares is lower than its net asset value (NAV) per share. As I write, Scottish Mortgage is trading at a 10.3% discount to its NAV.
In theory, that means I can buy stakes in the companies that Scottish Mortgage owns for cheaper than their market rate. To me, that sounds like a splendid deal.
The management team is aware of this and has implemented measures to decrease the discount. For example, it recently outlined plans to purchase £1bn worth of shares over the next two years. So far, it has purchased over £300m worth.
Interest rates
Reason number two is interest rates. We’ve seen rates rise over the past few years. However, as inflation begins to subside, market spectators are hopeful we’ll see them come down in the times ahead. We’ve already seen this in action, with the Bank of England reducing the base rate by 0.25% to 5% in August. Across the pond, the Fed recently cut rates by 0.5%.
In its most recent meeting, the Bank maintained the base rate at its current level. However, I’m expecting to see more cuts this year, and at the moment, it seems incredibly likely that we’ll see numerous cuts next year.
With Scottish Mortgage’s focus on owning growth companies, the last couple of years have been a struggle. High rates are a detriment to these sorts of businesses as they’re often leveraged with debt to fuel their growth. Higher rates mean this debt becomes more expensive to pay off.
However, as rates come down, growth stocks should begin to become more popular with investors again. That’s great news for the trust.
I also think the trust’s focus on growth stocks is exciting in itself. Some of the names it owns include companies such as Elon Musk’s SpaceX. In the years ahead, they have the potential to provide incredible returns.
The risks
That said, SpaceX is a private company. These businesses can often be difficult to value. Over a quarter of Scottish Mortgage’s portfolio consists of private holdings, which is a risk with the stock.
That’s because these companies can be overvalued. Should they go public, their valuation could decline. That said, it’s possible the reverse can happen, and its share price and therefore valuation, can rise.
Of course, another risk is a delay in future rate cuts. If we don’t get as many cuts as expected over the coming months, that could see the stock pulled back.
One to consider
But overall, I think Scottish Mortgage is a stock worth considering today. The trust looks like great value, in my opinion. I’m keen to pick up some shares in the coming weeks.
