I always find myself with time on my hands between Boxing Day and the end of the year. Apart from the golf course, I’ve more time to spend on looking at some good FTSE 100 stock ideas for the next year. One strategy is to look at the top performers from this year and see if the share price rally could continue into 2021. An example of this is the Scottish Mortgage Investment Trust (LSE:SMT).
The FTSE 100 stock has rallied over 117% over the past year. This means that an investment in it would have easily doubled my money. Even when you take into account the slump during the March sell-off, the stock growth has been remarkably linear over the past 12 months. This is the first tick in the box of a sustainable growth share for 2021. If the share price had erratic moves similar to Bitcoin, I’d be more cautious about buying in.
Riding on coattails
For those not familiar with the investment trust, it’s essentially a collection of stocks held by the investment managers. SMT has a wide remit on what it can invest in. It doesn’t just invest in FTSE 100 stocks, or property.
The strong rally for 2020 was due to an increase in the value of the underlying stocks held within the trust. As of Q3, the top holdings were Tesla, Amazon, Alibaba and Tencent (in that order). The top 10 stocks accounted for 52% of the overall trust. This is quite high, but it’s been the concentrated holdings that have really provided the large outperformance.
For example, the Tesla share price started the year below 100p and now trades close to 700p. The rise in market capitalisation has meant it’s now heading into the S&P 500. With the trust’s holdings being over £17bn, having 14% of this in Tesla (as of Q3), has directly helped its asset value surge as well.
A FTSE 100 stock for 2021?
Personally, I think that the Scottish Mortgage Investment Trust share price is sustainable and could grow in 2021. The growth this year was down to the skill of the investment managers. From this angle, there’s no reason why the trust can’t deliver a similar performance next year.
In my opinion, it’s not a business that’s overvalued. After all, the share price should track (with some margin for error) the net asset value of the stocks held. It’s also not a business that could easily lose out to competitors, as the performance is driven by buying and selling stocks. There’s not a finite amount that can be bought. The only restriction would be investors pulling out their funds.
Although controversial, I feel the same way about Pershing Square Holdings, which recently was promoted to the FTSE 100. It’s a similar business to the trust and I think that I’m going to buy both businesses shortly. It works as a diversifier with my more ‘traditional’ stocks. In effect it puts my money into the hands of experienced investment managers. That being the case, it can give me more time to pursue other active investments.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Alibaba Group Holding Ltd., Amazon, and Tesla and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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.