The Scottish Mortgage Investment Trust (LSE: SMT) share price has been far more volatile this year than I’d normally associate with the investment trust sector.
After a bull run starting in 2020 sent the shares flying, the subsequent crash has plunged them back down again. We’re looking at a 42% fall over the past 12 months now.
A look at the price performance this year could be enough to send me scurrying for the safety of a savings account:
Well, if I wasn’t a long-term investor, that is. Those of us who invest for decades know exactly how to deal with falling share prices. We carefully examine the companies behind them, and if we think they’re good value now, we buy.
Tech stock slump
The fall is down to one thing. Many investors have ditched the super-high valuations of NASDAQ shares in the face of the looming economic crunch. And Scottish Mortgage invests heavily in NASDAQ stocks.
Among the trust’s top 10 holdings we find Moderna (down 45% over 12 months), ASML (down 34%), and Illumina (down 61%).
Manager Baillie Gifford says of the trust: “We look to add value over five-year time frames, preferably much longer. We don’t see that we can add much more than anyone else in the short term“.
I find that refreshing. Looking at the past five years, the Scottish Mortgage share price has risen 66%, even after the 2022 fall. I reckon that’s an excellent performance.
The real question for investors now is whether the NASDAQ has fallen as far as it’s going to.
Correction
I’m convinced a NASDAQ correction has been long overdue. In 2020, we saw Tesla reach a price-to-earnings ratio of around 1,000. If that’s not a crazy overvaluation, no matter how good the company is, then I don’t know what is.
Even today, we’re still looking at a P/E of 86 for the electric vehicle pioneer. A share bought today would take 86 years to recoup its price, at current earnings levels. We’ll still need serious profit growth to justify that.
And in a soaring market, it’s not just the quality companies that climb in price. Unprofitable companies with little hope of ever earning the cash to justify their prices also get pushed to sky-high valuations.
So I reckon the 2022 shakeout has been good for both the NASDAQ and for potential investors. And I suspect it could signal the start of a new bull run for the Scottish Mortgage share price from a new, more rational, level.
Discount to NAV
There’s another way the shares might be a bargain buy. At 16 June, the trust recorded a net asset value per share of 803.75p. That puts the shares on a discount of 12.3%.
For investors who think US tech stocks have fallen far enough, that surely provides an extra boost. Am I one of them? I think the NASDAQ could well have further to fall, so I’m holding on and watching for now. And I think I see better value options for my latest portion of investment cash, more in keeping with my personal strategy.
But I do think investors who buy Scottish Mortgage today could be in for decent long-term gains.