The Scottish Mortgage Investment Trust (LSE: SMT) share price has fallen by almost 25% since the market closed on New Year’s Eve. It’s been a tough start to the year for shareholders.
However, SMT stock is still 55% higher than it was two years ago. What’s more, the trust’s management makes no secret of the reality that it only looks for long-term growth opportunities. It admits short-term performance can be unpredictable. For this reason, I’m wondering whether SMT’s share price slump could be a buying opportunity for me.
Is SMT cheap?
To find out whether Scottish Mortgage might be starting to look cheap, I decided to take a look at the trust’s largest holdings. If these looked cheap to me, then Scottish Mortgage shares might also be cheap.
At the end of January, the trust had 101 holdings. I don’t have the time to investigate all of these, so I decided to focus on the 10 largest holdings. These represented 41.4% of total assets at the end of January and included big names such as Moderna, Tesla, Tencent, Alibaba, and Amazon.com.
What I found was these largest holdings are trading on an average of 35 times forecast earnings. On average, these 10 companies are expected to deliver earnings growth of 14% over the next 12 months.
Based on this quick snapshot, my feeling is that the price is high for this level of growth. On balance, my view is that SMT’s largest holdings are probably not cheap. This suggests to me that Scottish Mortgage shares may not be cheap either. However, I think it’s possible that I’m focusing too much on the short term.
Scottish Mortgage share price: still up 2,500%
One thing I like about Scottish Mortgage Investment Trust is that it has a very long history. Using free tools like Google Finance, we can check the trust’s share price progress right back to 1993.
I’ve just done that, and what I’ve found is that SMT shares have gained 2,500% since then. Over the last 10 years alone, they’ve delivered a 650% gain. Those are exceptional figures. Very few investment funds ever achieve this kind of result.
Even so, it’s worth remembering these gains haven’t come in a straight line. The Scottish Mortgage Investment Trust share price fell by 50% after the dot-com crash in 2000, before starting to rise again in 2003. SMT stock also fell by 50% after the 2008 crash, before returning to growth.
I think we’ve just seen another tech stock boom. Although the SMT share price has already fallen by more than 30% from the 1,500p+ highs seen in November, I think it could have further to fall.
Despite this concern, I still believe the trust holds some great businesses that should do well over the long term. One option for me now would be to buy some Scottish Mortgage shares and forget about them for 10 years.
However, I’m just not comfortable with the risk/reward balance right now. For this reason, I’m going to continue to stay away from this stock. I hope that if I’m patient, I’ll find a better opportunity to buy.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Alphabet (A shares), Alphabet (C shares), Amazon, 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.
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