What do Nvidia, Tesla and Illumina have in common? Two things. Firstly, they’re all highly valued US Nasdaq stocks. And secondly, they’re all held by Scottish Mortgage Investment Trust (LSE: SMT).
Is that good or bad? I’d say a bit of both. And it’s the shifting balance between the two that’s making me think seriously about buying Scottish Mortgage shares today.
The downside is that buying high-flying tech stocks can be very risky. And some US ones reach dizzying heights. Tesla, for example, is currently on a trailing P/E ratio of around 200.
They’re shares I often think I’d like to own. But I’m held back by valuations that far exceed anything I’m likely to see from UK shares.
Buy the trust instead
Buying Scottish Mortgage Investment Trust shares would get me a whole collection of volatile assets, which is a risk. In fact, the SMT share price has fallen 38% since November 2021. And that puts it on a 19% loss over the past 12 months.
But on the upside, that 38% since November 2021 makes it more affordable. I’m always waiting for high-priced tech stocks to be hit by a correction. We’ve had one now. And that makes me seriously think of buying.
Scottish Mortgage shares are now back in line with the Nadaq’s gains over the past five years, having previously raced ahead. To me that suggests the trust had been overvalued, but probably isn’t now.
Tech stock diversification
I see less risk buying SMT than trying to pick my own US high-techs. The trust spreads the money across far more individual stocks than I ever could. And many of them are far more moderately priced than the likes of Tesla.
I do see risk from China-based stocks, with Tencent and Alibaba among SMT’s 10 biggest holdings. Alibaba has fallen 55% over the past 12 months, with Tencent down 75%.
There are tensions between the US and China, with a threat of Chinese companies being delisted. Still, will the focus on Russian actions relieve the geopolitical pressure on China? I think it might.
Scottish Mortgage Investment Trust valuation
On the valuation front, Scottish Mortgage shares are on a 3.3% discount to net asset value as of the most recent count. That doesn’t compare well to, say, Alliance Trust, which is also heavily invested in US stocks. Alliance shares are discounted 7.4%, which looks like a better bargain on the face of it. But it’s invested in more conservative — and probably safer — stocks.
On balance, I reckon SMT’s modest discount is attractive. I’ve often seen investment trusts that buy techie growth stocks valued at a significant premium to their assets.
To sum up, I think Scottish Mortgage Investment Trust is a risky investment. But I’m convinced the diversity it gives makes it safer than buying individual stocks for myself. And at the moment, I see the price as about right. I’d buy.