It’s been an uncertain start to the year for investors in the tech-heavy Scottish Mortgage Investment Trust (LSE: SMT). Although the Scottish Mortgage share price has doubled over the last 12 months, the stock has been volatile in 2021.
After hitting a high of 1,418p in February, SMT shares fell to 1,017p before bouncing back to around 1,200p. It’s been a bumpy ride, but I think there are good reasons to expect the shares to return to growth.
Scottish Mortgage Investment Trust’s strategy is to focus on identifying companies that are disruptive, ambitious, and capable of serious growth. The trust’s managers then take meaningful positions which they aim to hold for at least five years.
This strategy has resulted in Scottish Mortgage identifying big winners such as Tesla, Amazon, and Netflix, before many mainstream funds saw the opportunities.
With refreshing honesty, SMT’s managers say that they look to add value over five years or more. Over shorter periods, they say that “we don’t see that we can add much more than anyone else”.
SMT’s managers get different results because they have a different strategy. This is definitely not a fund that will follow the FTSE 100.
Cheaper than it looks?
It would be easy to say that the Scottish Mortgage share price has been boosted by the trust’s exposure to expensive tech stocks. However, I’m not sure that’s fair.
Yes — some key holdings, such as Amazon and Netflix, trade on more than 50 times forecast earnings. They are expensive, but they also have a long track record of disruptive growth. Today’s prices could look cheap in a few years.
Looking elsewhere, some of SMT’s holdings actually look quite reasonably priced to me. For example, the trust’s largest holding is Chinese ecommerce group Tencent. This is currently valued at around 30 times 2021 forecast earnings. I don’t think that’s too expensive, given that Tencent’s profits have grown by around 40% per year since 2015.
What about Tesla? SMT has sold some of its Tesla stock, but the electric car maker still accounts for around 5% of the trust’s portfolio. However, even if the Tesla share price fell by 50%, that would still only knock 2.5% off the trust’s book value. Hardly a disaster.
Scottish Mortgage share price: a safe bet?
For me, SMT’s diverse portfolio is one of its main attractions. I couldn’t easily build a portfolio of global growth stocks by buying them individually. But with SMT, I can buy a single FTSE 100 stock and get the same exposure.
I think the long-term prospects for SMT are good. But I can see a couple of risks that could affect performance over the shorter term.
One concern is that long-term manager James Anderson is due to retire soon. Anderson has been at the helm of the trust for 21 years, so he’s played a major role in some of its biggest successes.
A second risk is that the trust could be hit by a market-wide shift away from growth stocks. I don’t know how likely such an event is, but I can’t rule it out.
Would I buy Scottish Mortgage shares today? At the current price, I’d be happy to open a small position. That’s my normal procedure with any new buy — start small, then add as I gain confidence and learn more about the business.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon, Netflix, 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.