Scottish Mortgage Investment Trust (LSE:SMT) shares have been on a downward track over the last six months. The stock has lost 42% of its value over that period and there are several reasons for this. However, Scottish Mortgage has been one of the best-performing investment trusts in recent years, and after the sustained fall, maybe I should buy!
Why did Scottish Mortgage fall?
Scottish Mortgage is heavily weighted towards growth and tech stocks. Many of these stocks collapsed earlier this year as investors moved from growth to value. These stocks, including Tesla and Moderna, performed very well towards the end of the pandemic but have struggled more recently.
Tech stocks dropped on worries about higher inflation and tighter monetary policy from the Federal Reserve. January’s sell-off came on the back of a surge in US Treasury yields, which hurt more expensive technology stocks that are valued on future growth expectations.
Moreover, inflation and higher interest rates are encouraging investors to favour value and near-term returns over growth. With inflation at 7%, investors are likely to want dividends now rather than the prospect of growth over the next five years. It’s also the case that higher interest rates can increase the cost of growth.
Is Scottish Mortgage cheap?
Scottish Mortgage is valued relative to its holdings. And that means we need to dive deeper to understand whether this stock can be considered cheap. But while some might see the 42% discount as a signal that this stock really is cheap, I’m still concerned about some of the companies it holds.
Holdings include Tencent, NIO, Nvidia, and Illumina. All of which have fallen over the past year, some substantially, as tech and growth stocks lost their appeal. Tencent, which represents nearly 5% of Scottish Mortgage’s holdings, is trading at less half of its peak, having seen a slowdown in growth, which hasn’t pleased investors.
Several of its holdings are also hard to value. Scottish Mortgage’s largest holding is Moderna — the company that created the mRNA vaccine deemed most effective during the pandemic. It was a huge winner when Covid represented a massive threat, but I’m not sure about its future. Personally, I’m not sure whether governments will continue to support free boosters for age groups not deemed at risk. In fact, I currently have Covid and while it hasn’t been overly pleasant, I’m not sure whether the cash-strapped NHS would see it necessary to give me another booster later in the year. Moderna’s profits are already predicted to fall from $12bn in 2021 to just $2bn in 2024 as demand for Covid-19 jabs decreases.
Another prominent stock within the trust’s holdings is Tesla. Elon Musk’s EV firm represents 5.29% of the portfolio. However, I’ve long been concerned about the company’s $1trn valuation. During its record-breaking 2021, Tesla reported revenues of just $53.8bn, leading to adjusted EBITDA of $11.6bn and net income of $5.5bn. For me, it’s still a long way from being a company that’s genuine worth anywhere near $1trn. This is compounded when I consider the increasingly competitive EV market. Not only do other manufacturers promise better performance, but some are coming in a lot cheaper.
Should I buy?
This one isn’t for me. I’m concerned about the long-term prospects for some of their holdings. Maybe if it falls further, I’ll reconsider.