When I look at the current list of FTSE 100 stocks, one company in particular leaps out at me. It not only occupies a unique position in the Footsie today, but also in the index’s entire history.
The stock has become hugely popular with investors. Furthermore, my Motley Fool colleagues who’ve written about it all seem to be somewhere between bullish and super-bullish on its prospects. Its name is Scottish Mortgage Investment Trust (LSE: SMT), and here’s why I’d sell it today!
A unique FTSE 100 stock
Scottish Mortgage is unique in that it’s the only generalist investment trust currently in the FTSE 100. Since the index launched in 1984, only a handful of such trusts have ever grown big enough to join the UK’s blue-chip elite. And all those predecessors failed to maintain their status.
During their time in the index, none reached as big a market capitalisation as Scottish Mortgage has achieved. At a new share price high of 755p, made in Thursday trading, its market cap is just over £11bn. It ranks comfortably in the top half of the FTSE 100. No other investment trust has managed this in the Footsie’s 36-year history.
Of course, it’s largely the valuations of Scottish Mortgage’s underlying holdings that support its own valuation. The trust invests predominantly in businesses underpinned by the technologies of the digital age. It seeks to identify those it reckons can grow exponentially. Its top six holdings are over 40% of its assets, and include familiar US names Amazon and Tesla, and Chinese giants Tencent and Alibaba.
Don’t fight the Fed
Over the last decade, the Federal Reserve and other central banks have provided unprecedented stimulus for financial markets. As such, investors have embraced the mantras “don’t fight the Fed”, “buy what’s going up”, and “valuation doesn’t matter”.
With value-agnostic passive index funds also pumping money into the same popular names, investment has become heavily concentrated in a relatively small number of leading stocks. Largely of the type found in Scottish Mortgage’s portfolio.
Let me make two observations. First, the now-FAANGs-dominated NASDAQ index traded at a price/sales (P/S) ratio of 1.02 in 2010, but the P/S has climbed to 4.35 over the last decade. Meanwhile, if the average P/S of Scottish Mortgage’s top six holdings, which I calculate as 9.2, is any guide, the trust owns some of the most richly-rated companies in what is — by historical standards — a richly-rated market.
My second observation is that never before in history has a market dominated by a high concentration of popular stocks ended well.
Scottish Mortgage: a FTSE 100 stock in danger?
Now, don’t get me wrong. I think Scottish Mortgage owns many great businesses. However, I reckon that to buy into it at anywhere near its current price, you have to believe there’s a new valuation paradigm in which P/S ratios of maybe 5-10 for indexes like the NASDAQ are the future norm.
Personally, I’m highly sceptical of new paradigms in the investing world. I think it’s infinitely more likely the momentum-driven markets of the past decade have produced a major disconnect between price and fundamental value. A big correction of this would pull the rug from under Scottish Mortgage’s elevated position in the FTSE 100. It’s for this reason I see it as a stock to sell.