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Scottish Mortgage Investment Trust (LSE: SMT) had a poor start to the year. After its incredible 105% rally in pandemic-ridden 2020, Scottish Mortgage’s share price is down 30% year-to-date (and 14% year-on-year). Still, the investment trust has been one of the UK’s best performers over the past decade.
So why is it on a downward trajectory? And does this drop represent an opportunity for me to grab cheap stocks? We’ll take a look.
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Why is the stock price falling?
So why after such a strong performance, over a few tough years, is Scottish Mortgage’s share price falling?
First, the trust is known for its large weighting in growth stocks. Examples of these include You’re here, which SMT invested in in 2013 when the shares changed hands for around $6. And smart investments like these have been a big part of the fund’s great success. However, with global inflation on the rise, this trend tends to lead investors to invest their money in “safer” value stocks. As a result, the stock price fell.
Another reason for the downfall is Scottish Mortgage’s focus on technology. As of March 31, its main holdings included Tesla, Nvidiaand Amazon. Although these stocks have performed well in the past, 2022 has seen them suffer. Shares are down 17%, 35% and 16% year-to-date, respectively, so it’s no surprise Scottish Mortgage’s share price followed suit.
That said, I think these are short-term concerns.
Management clarifies that the trust has the “objective of maximizing its total return for its shareholders over the long term” – and he uses the FTSE World Index as a benchmark over five years. Of course, past performance does not represent future returns, over the past five years SMT has returned almost 140% to patient shareholders. And on top of that, it has survived multiple challenges over the years, such as the dotcom crash of 2000, underscoring its resilience.
However, there is reason to argue that Scottish Mortgage’s share price may continue to decline. For starters, her upper outfit Modern (7.1%) is expected to see profits fall from $12 billion in 2021 to $2 billion by 2024. And while Tesla is growing strongly, its price-earnings ratio suggests it is seriously overvalued. A correction to this could cause the Scottish Mortgage share price to fall.
Despite this, the trust is in the safe hands of Tom Slater and soon-to-retire James Anderson, who have been at the helm for a long time, playing key roles in its success. I have confidence that their insightful investment style will allow the trust to continue to thrive in the future.
What do I do
So whatever the short-term concerns, I think the fall in the Scottish Mortgage share price presents a great opportunity. Trust has proven that it can survive tough times in the future. And despite his hollowness, I trust the management team to guide him. As such, I would buy the shares today.