The Scottish Mortgage Investment Trust (LSE: SMT) share price has slumped almost 40% in 2022. And it remains under significant pressure as the global economy teeters on recession and higher interest rates hammer consumer spending power.
But investors over at Hargreaves Lansdown have been using fresh weakness as an opportunity to buy. In the past seven days, Scottish Mortgage shares were the fifth most frequently purchased on the London Stock Exchange. In fact, the FTSE 100 stock accounted for 2.99% of all buy orders.
So should I follow Hargreaves Lansdown investors and try to capitalise on recent falls? Or should I avoid the tech-focused investment trust?
So what’s happened?
Scottish Mortgage is run by investment manager Baillie Gifford. It gives investors an opportunity to get exposure to high-growth US and Chinese shares. Some of the company’s holdings include household names Tesla, Netflix, Spotify and Amazon, though it also holds shares in dozens of more obscure technology companies from across the globe.
Scottish Mortgage Investment Trust’s Top 10 Holdings (as of 31 August 2022)
Company
% Of Fund
Moderna
7.1%
Tesla
6.5%
ASML
5.5%
Illumina
4.3%
Tencent
3.7%
Meituan
3.6%
Space Exploration Technologies
3%
Amazon.com
3%
Northvolt
2.9%
NIO
2.6%
TOTAL
42.1%
This has left Scottish Mortgage shares extremely vulnerable in 2022.
Consumer spending is coming under extreme pressure as central banks act to curb runaway inflation. As a result, the robust earnings growth that the market had been expecting for much of the sector has evaporated. So the share prices of Amazon et al have fallen considerably, pulling Scottish Mortgage’s share price lower as well.
What next?
While shares have been sold off across the board, tech stocks have been particularly battered due to their high valuations. Their elevated price-to-earnings (P/E) ratios reflect investor hopes of stratospheric profits growth. Consequently, their prices come crashing back down to earth as those forecasts have begun to look stretched.
I worry that Scottish Mortgage’s share price could be set for further falls as well. This is because many of the investment trust’s core holdings continue to carry whopping valuations. And given the steady flow of disappointing economic news and hair-raising inflation readings, investor confidence could slump again at any time.
Tesla, for example, trades on a forward P/E ratio of 71 times. Other key holdings, like biotechnology business Illumina and semiconductor manufacturing equipment business ASML, carry multiples of 69 times and 30 times respectively.
The verdict
On the plus side, Scottish Mortgage’s shares now trade at a considerable discount to its net asset value (NAV). In fact, it trades a full 10% cheaper than the value of its underlying assets. This could give the company’s share price extra room to soar when the anticipated economic recovery kicks in.
I like a lot of shares that Scottish Mortgage Trust holds. I think Amazon and Tesla for example will be big winners as e-commerce and electric vehicle demand grow.
But I’m still concerned about some of these growth companies’ sky-high valuations. And I wouldn’t buy many of the other tech companies that Scottish Mortgage holds either. With the economic outlook still highly uncertain, I’d rather buy other UK shares right now.
The post Hargreaves Lansdown investors are piling into Scottish Mortgage shares! Should I join in? appeared first on The Motley Fool UK.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended ASML Holding, Amazon, Hargreaves Lansdown, 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.