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Scottish Mortgage shares are down 36%: should I buy now?

Dylan Hood — Tue, 30 Aug 2022 07:32:00 +0000

Scottish Mortgage Investment Trust (LSE: SMT) shares have fallen a whopping 36% so far in 2022. The main reason for the drop is rising inflation and subsequent interest rate hikes, which have weighed on stock market valuations. Over a 12-month period, the situation looks even bleaker, with the shares falling just under 40% in value. With inflation still on the rise, is now the time to buy this stock? Let’s find out.

A rocky road

Red hot inflation has been a key market trend in 2022. With UK inflation reaching 10.1% in July and predicted to rise to over 18% by January, the situation looks pretty grim. Interest rates have been hiked to 1.75% in the UK in an effort to curb rising prices. This is putting severe pressure on growth stock valuations, which is very bad news for Scottish Mortgage. This is because the trust’s holdings are primarily focused on exactly this type of asset.

For example, the trust’s top three holdings are Moderna (8.3%), Tesla (6.7%), and ASML (6.6%). All of these stocks fit into the high-growth stock category and have exhibited high volatility so far in 2022. As interest rates continue to rise, and markets become increasingly uncertain, Scottish Mortgage shares could be in for an ongoing bumpy ride.

Another reason why the shares have suffered is pressure from Chinese regulatory authorities on US-listed Chinese companies. This has sparked the threat of potential delisting, which has vastly reduced investor confidence. Companies like NIO (which makes up 2.9% of Scottish Mortgages portfolio) have seen their shares tank on the potential of being delisted from the NYSE.

Reasons I like the stock

So why do I like the trust? For starters, at 829p, the shares are much cheaper than they were a year ago. In addition to the lower price, I adopt a longer-term outlook when looking at shares. Baillie Giffords’s flagship trust looks to “add value over five-year time frames, preferably much longer”. So, maybe I should discount the upcoming short-term volatility and look further into the future. Although past returns are no indication of future performance, Scottish Mortgage’s 606% 10-year return – compared to a 231% return for its benchmark the FTSE All World Index – highlights the stellar management of the trust.

In addition to this, being an investment trust, it allows me access to a bundle of assets in different industries, all under one investment. This is great for reducing my portfolio’s risk level. It also allows me access to non-listed companies, like Elon Musk’s SpaceX, in which Scottish Mortgage owns a £430m stake.

Am I buying?

I think that in the short term, Scottish Mortgage shares could face more volatility. However, here at The Motley Fool, we’re long-term investors. I think that under £9, the investment trust shares could land me some healthy returns over a broader time horizon – say 10 years. For that reason, I’m seriously considering adding this stock to my portfolio at today’s price.

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Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended ASML Holding and Tesla. 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.

Are Scottish Mortgage shares a bargain at 822p?

Dylan Hood — Tue, 23 Aug 2022 08:27:55 +0000

2022 has been a tough year for growth stocks. It’s only natural that investment trusts that target growth stocks have taken a beating too. Scottish Mortgage Investment Trust (LSE: SMT) is a prime example of this. The high-growth trust performed well in 2020 and 2021 but has fallen over 36% so far in 2022. Widening this timespan to 12 months, and the shares have fallen an equally disappointing 39%. So, currently sat at 822p, is the stock a bargain buy? Or should I steer clear of Baillie Gifford’s flagship investment trust? Let’s investigate.

The story so far

To understand why the stock has fallen, we must cast our minds back to the height of the Covid-19 pandemic. In an effort to remedy the economic shutdown, central banks across the world poured billions into economies to keep them afloat. At the same time, the virus disrupted supply chains. This meant there was less supply, but people had more money (on a macro scale) to spend on the same goods. The result of this – rising prices.

Fast forward to 2022, and inflation has been reaching sky-high levels. To make things worse, the tragic Russia-Ukraine crisis has sent energy prices soaring, adding to inflationary pressures. Now central banks are faced with a new task: to slow down rising prices. They do this by increasing interest rates.

When interest rates increase, investors withdraw their money from higher-risk, speculative assets like growth stocks, and put them into safer assets. This is because they can earn a better risk-free rate. Interest rates in the UK and US have been on the rise recently, the former sitting at 1.75%.

Scottish Mortgage’s main holdings are exactly the type of stocks that are being negatively affected by this kind of market. For example, its top two holdings Moderna (8.3%) and Tesla (6.7%) have fallen 39% and 28% so far in 2022. Many analysts are predicting inflation to keep rising, which likely means that rates will too. If this does happen, it would be bad news for Scottish Mortgage shares.

A long-term play

Here at The Motley Fool, we are long-term investors. That means picking quality stocks and holding them for up to 10 years. Scottish Mortgage operates with the same thesis. It looks to “add value over five-year time frames, preferably much longer” and explicitly states that it doesn’t “add much more than anyone else in the short term”. So, perhaps I should be discounting the current volatility, and be operating with more of a long-term view, trusting the fund’s management.

I only have to check on the trust’s previous returns to see this management in action. Over the last five years it has returned 118%, and over the last 10 years, a whopping 606%. This vastly outperforms the FTSE All World Index, which is the stock’s benchmark.

Am I buying?

I’m not buying just yet though. I think in today’s macro climate, a growth-focused trust is too risky for me. However, I will be keeping this stock on my watch list as I think it could have the potential to yield some big returns over a 10-year span.

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Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesla. 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.

Scottish Mortgage shares are back on the rise: is now the time to jump onboard?

Dylan Hood — Sun, 07 Aug 2022 08:57:50 +0000

Scottish Mortgage (LSE: SMT) shares have been suffering for some time. Year to date, the shares are down 29%, and over the past 12 months, they have fallen 33%. This disappointing performance came after a knockout year in 2020, where the stock rose over 106%.

However, things seem to be on the up for Scottish Mortgage shares, which have risen over 25% in the past month. With today’s uncertain macroeconomic outlook, is now the time to be buying the shares? Or should I avoid this high-growth index fund? Let’s find out.

Economic considerations

On Thursday, the Bank of England raised interest rates by 0.5%, to 1.75%. This has come after months of red-hot inflation, which peaked at 12.7% in June. Scottish Mortgage was able to ride the early wave of high valuations in 2020 and the start of 2021, but the interest rate hikes of 2022 seem to have burst this bubble.

When interest rates rise, people tend to pull money out of speculative investments like growth stocks and put them into safer assets like bonds. This is because they can achieve a higher risk-free rate of return. This is bad news for funds like Scottish Mortgage, as a large portion of their holdings is focussed on high-growth equities.

For example, its top 10 holdings include Tesla (6.7%), Moderna (8.3%), and Tencent (3.8%), all of which are classed as growth stocks. Higher rates have hurt these stocks’ lofty valuations and pushed the Scottish Mortgage shares down. As rates continue to rise to control inflation, the shares could face even more pressure.

Upward momentum

As mentioned, the shares have seen an impressive surge in recent weeks. This movement reflects the encouraging performance of some of the trust’s underlying assets. For example, biotech firm Moderna has risen over 35% since the start of June and makes up a hefty 8.3% chunk of the trust’s asset holdings.

I think the upward momentum reflects the firm’s top-tier management. Although past returns are no indication of future performance, the fund has generated a five-year return of 118% and a 10-year return of 606%. Both of these figures comfortably outperform the FTSE All World Index, which is the trust’s benchmark.

The trust also gives me access to companies that aren’t publicly traded. For example, Elon Musk’s SpaceX makes up 2.9% of the trust. This allows me to benefit from growth I couldn’t get on my own, which is an attractive opportunity. In addition to this, like any investment trust, I am gaining a stake in a wide array of companies and industries all under one investment. This helps my portfolio with diversification and reduces risk.

The verdict

Overall, I think now could be a risky time to buy Scottish Mortgage shares. Yes, the shares are well below their 2021 levels, and the trust has demonstrated excellent management historically. However, I think that rising rates could continue to hamper the fund’s performance, as it relies heavily on growth stocks. Therefore, this stock will remain on my watchlist for now.

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Are Scottish Mortgage shares good buys at 774p?

Dylan Hood — Mon, 11 Jul 2022 11:22:42 +0000

In the first seven months of 2022 Scottish Mortgage (LSE: SMT) shares have fallen over 40%. That’s around 10 times more than the drop in the FTSE 100 over the same period, underlining the disappointing performance. Over the past 12 months, the shares are down an equally discouraging 39%.

However, last week the shares experienced an encouraging 5% jump in value. Currently sitting at 774p per share, down almost 50% from its all-time high, is now the time for me to add Scottish Mortgage stock to my portfolio?

Why the trust has underperformed

The main reason why Scottish Mortgage shares have underperformed this year is the nature of the stocks it holds. The trust targets high-growth companies and aims to hold them for a minimum of five years to generate healthy returns. This strategy has worked well in the past, highlighted by an impressive 585% increase in the share price over this period.

However, 2022 has been characterised by rising inflation and interest rates. Rising rates put big pressure on the valuation of growth stocks, which soared in 2020 and 2021. This has caused investors to pull out of growth stocks and pour into safer value stocks. The performance of Scottish Mortgage’s top holdings has taken a hit accordingly. For example, Tesla (5.7%), NVIDIA (2.5%), and Tencent (5%) are down 37%, 47%, and 21% year to date. Although Tesla is up 9% over the past 12 months, Nvidia and Tencent are down 22%, and 34% respectively.

A buying opportunity?

2022 has proved a tough year so far for Scottish Mortgage shares. However, this volatility may only be a flash in the pan in the long run. As mentioned, the trust looks for value over a minimum five-year period – preferably longer – and its healthy past returns show the exceptional execution of this thesis. Therefore, perhaps I should be discounting the current volatility and adopting a broader outlook?

This situation seems especially prevalent in China, where Scottish Mortgage has about one-fifth of its holdings. Recently, Chinese stocks listed in the US have taken a hit due to tough regulatory rules. However, China is still a rapidly-growing economy, and having such a large stake in this growth could pay dividends in the long run.

Another positive about the fund is that it gives me access to a wide portfolio of companies all under one investment. In addition to this, I also get access to unlisted companies, like SpaceX, in which the trust holds a large position.

What I am doing now

Overall, I think that at 774p, Scottish Mortgage stock could be a great addition to my portfolio. Yes, there’s some short-term volatility that has beaten down the share price, but in my eyes, this offers me a chance to grab shares at a discount. The diversification and access to unlisted companies are big pluses too. Therefore, I’m seriously considering adding a position to my portfolio soon.

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Could the Scottish Mortgage share price be about to turn around?

John Choong — Thu, 02 Jun 2022 06:32:00 +0000

Scottish Mortgage Investment Trust (LSE: SMT) is one of the world’s biggest investment trusts. The share price is down 35% this year, following US indices into bear market territory. However, positive economic data released last week made its share price jump by 15%. As such, the trust may be set for a turnaround.

Declines are difficult to bear

Seeing a company’s share price plunge deep into the red is never a pretty sight. Unfortunately, the trust’s investors had to bear with losses of up to 45% at one point. So, what’s behind the monumental drop in share price? Well, the Scottish Mortgage portfolio holds an abundance of growth names. The top 10 holdings alone have an average price-to-earnings (P/E) ratio of 37, which is more than twice the S&P 500‘s P/E ratio of 16.

Scottish Mortgage Investment Trust Holdings	Fund %
Moderna	6.5%
ASML	6.4%
Illumina	6.3%
Tesla	6.2%
Tencent	4.9%
Meituan	3.0%
NVIDIA	2.7%
Amazon	2.6%
Alibaba	2.6%
Kering	2.4%

Source: Scottish Mortgage Investment Trust

Growth stocks suffer the most when interest rates rise, as has been the case due to sky-high inflation. As a result, spending is expected to decrease due to higher borrowing costs. As growth stocks get their valuations from future cash flows, a slowdown in future spending slashes their valuations.

To make matters worse, China’s zero-Covid policy has led to several lockdowns in big cities. These lockdowns have had an impact on several of the FTSE 100 trust’s top Chinese holdings. Consequently, the Scottish Mortgage share price has suffered a decline from its biggest investments.

Trust and hope

That being said, Scottish Mortgage saw its share price rebound last week. This was down to a generally positive set of US economic data. Consumer spending figures were rather upbeat, and minutes released from the Fed meeting eased fears of a 0.75% rate hike. But most importantly, the core price consumption expenditure (PCE), the Fed’s preferred index for measuring inflation, pointed towards inflation peaking in April. This led to one Fed official suggesting that the central bank could even pause rate hikes in September. Officials from China also mentioned plans of lifting lockdowns which sent many of the portfolio’s Chinese stocks rallying, positively impacting SMT shares.

Core PCE Price Index Inflation (Source: US Bureau of Economic Analysis)

Unstable foundations

While Scottish Mortgage shares present a tremendous amount of upside, it also comes with plenty of risks. Since its remarkable one-week recovery, oil prices have shot back up to the $120 per barrel mark. Given that the main cause of inflation has been high oil prices, an EU ban on Russian oil imports, along with the reopening of the Chinese economy, isn’t going to drive inflation down anytime soon.

Moreover, although China has began lifting its lockdowns, there’s no certainty that a similar episode won’t happen again in the future. Therefore, I’m doubtful that the fund is completely out of the woods for a turnaround. The Chinese government’s ability to manipulate share prices of its local companies also presents too big of a risk to me. Thus, I won’t be looking to invest in SMT shares anytime soon. Instead, I’ll be looking to purchase other shares that could benefit my portfolio with more stability.

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John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has no position in any of the shares mentioned. 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.

Here’s why the Scottish Mortgage share price is down 25%

John Choong — Mon, 02 May 2022 06:58:00 +0000

Scottish Mortgage Investment Trust (LSE: SMT) is the world’s most popular trust fund due to the size of its asset class and its incredible track record of generating high returns. Nonetheless, the Scottish Mortgage share price has seen a 25% drop since the start of the year. This is in part due to the decline of valuations in growth stocks.

Interest goes both ways

Scottish Mortgage was started as a mortgage-based fund, but has since transitioned to a heavily tech-based fund. This transition brought investors monumental returns from the tech boom during the pandemic. However, its share price has since fallen 40% from its all-time highs due to the underwhelming recent performance of those big tech names. This list includes the likes of Netflix, Zoom, Shopify, and many other growth stocks.

The reason for the heavy decline can be attributed to inflation and the rise of interest rates. The consensus is that when interest rates rise, growth stocks tend to suffer. This is because growth stocks have higher valuations based on future cash flows. High interest rates tend to slow economies down with the aim of suppressing consumer spending. As a result, growth companies are then expected to receive reduced cash flows which end up cutting their future valuations. This results in investors losing interest in those companies.

Upon assessing the Scottish Mortgage portfolio, it’s notable that the majority of its investments have seen monumental declines since the year began. Its biggest holding, Moderna, has seen its share price plunge 65% from its all-time high. The trust’s second-largest holding, Tesla, has also seen its share price suffer lately despite surpassing production estimates.

Locked down profits

The top holdings within Scottish Mortgage Trust include heavy investments in biotech, technology, and logistics. Within those names, the fund has a heavy allocation to China. As such, investors who want exposure to China can do so by investing in Scottish Mortgage as a close substitute. The FTSE 100 fund holds positions in Tencent, Alibaba, and even TikTok’s parent company, Bytedance.

As an emerging market, China’s growth is unprecedented, but its zero-Covid policy and authoritarian tendencies have seen many of its companies lose huge chunks of their valuations. The latest lockdowns in Shanghai and Beijing haven’t helped the Chinese investment case either. With three of Scottish Mortgage’s top holdings being Chinese-based companies I expect its share price to continue underperforming in the near term.

Trust in Scottish Mortgage Trust?

But has trust run dry in Scottish Mortgage Trust? I’d argue not. The flagship fund is managed by Baillie Gifford, one of Britain’s most popular fund managers. The firm has an excellent track record of producing stellar returns and I reckon that this is just a pit stop on a road to larger returns. For young investors like myself, the current bear market presents buying opportunities.

The current Scottish Mortgage share price is trading at a price-to-earnings (P/E) ratio of two. So, this could be a suitable entry point to buy the dip. Nonetheless, I feel the risks associated with investing heavily in Chinese stocks outweigh any potential returns. Therefore, I’m not planning to invest in Scottish Mortgage shares for the foreseeable future.

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Is the Scottish Mortgage share price a bargain under 900p?

Dylan Hood — Mon, 07 Mar 2022 10:44:28 +0000

The Scottish Mortgage (LSE: SMT) share price has fallen over 16% in the last week, currently sitting at 844p. Extending this time frame, the shares are down 34% year-to-date. This is the opposite to its bullish trajectory in 2020 when it climbed over 106% throughout the year.

With the shares well below the 900p mark, is now the right time for me to add this stock to my portfolio? Or should I be steering clear of the tech-heavy investment fund? Let’s take a closer look.

Understanding the Scottish Mortgage share price

The easiest way to explain the movement of the Scottish Mortgage share price is to take a closer look at its portfolio. While the fund has exposure to many industries, it is heavily weighted towards tech growth stocks. For example, its top 10 holdings include Nvidia (2.9%), Tesla (5.3%), and Tencent (4.9%).

Understanding why this was leading to rising share prices is tied with the broader macroeconomy. During the pandemic, central banks across the world lowered interest rates in an effort to prop up the economy. This led to increased stock market investment, as bond and savings returns declined. This pumped-up stock valuations, especially in high growth tech stocks, and hence the Scottish Mortgage share price soared as a consequence.

However, government spending and supply chain problems induced by Covid-19 have served central banks with a new problem – tackling rising inflation. For example, in the US, the annual inflation rate hit 7.5% in January. The way central banks tackle this is by doing the opposite of what they did in 2020 and raising interest rates. With rates on the rise, investors have been selling out of high-growth positions. Hence, the Scottish Mortgage share price has taken a beating.

What I’m doing now

There is no doubt that Scottish Mortgage is an excellently managed fund, regardless of current price moves. For example, over the past 10 years, it has returned 650% to investors. In addition to this, the fund prides itself on long-term growth, so perhaps I should be discounting this short-term volatility and adopting a broader outlook. In addition to this, it also allows me to have a heavily diversified portfolio of companies under one investment, which could help reduce volatility further down the line.

That being said, the short-term outlook for the Scottish Mortgage share price still worries me. On top of current inflationary pressures, the Russia-Ukraine conflict has led to increased supply concerns. For example, the price of oil has skyrocketed to $130. I expect this to negatively impact many of the businesses that Scottish Mortgage holds, and hence the shares could continue to slide below the current level.

Overall, although the shares could lead to some great long-term growth for my portfolio, I think the Scottish Mortgage share price has further to fall in the short term. Therefore, I will be waiting to add this stock to my portfolio.

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