Down 50%, are Scottish Mortgage shares a bargain growth pick?

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Scottish Mortgage Investment Trust (LSE:SMT) shares are down 50% over the last six months. Scottish Mortgage is a FTSE 100-listed fund that focuses on growth and tech stocks. It has significant exposure to American, Chinese and unlisted shares.

The fund’s falling share price over the last year reflects the decreasing value of the shares it holds. For example, Scottish Mortgage’s biggest holding is Moderna. The vaccine-maker, which accounts for 6.25% of SMT’s portfolio, is currently trading around 30% of its 2021 highs.

But in recent years, Scottish Mortgage has been one of the best-performing trusts, constantly picking big winners, often from the US. So, is it now a bargain growth stock? And should I be adding it to my portfolio?

What stocks does Scottish Mortgage hold?

The trust is heavily weighted towards growth and tech stocks. These very much fell out of fashion earlier in the year and share prices plummeted.

January’s tech sell-off came on the back of a surge in US Treasury yields. This hurt more expensive growth and technology stocks that are valued on future growth expectations. Growth stocks often trade with very high price-to-earnings (P/E) multiples, or if they’re not profit-making, high price-to-sales (P/S) ratios.

As mentioned, the fund’s biggest holding is Moderna. While other top-10 holding include TencentNvidia, Tesla and Illumina. All of these fell over the last year.

Only one of SMT’s top 10 holdings isn’t a tech stock, and that’s Kering. However the French multinational, which owns brands like Balenciaga, Bottega Veneta, Gucci, Alexander McQueen and Yves Saint Laurent, has seen its share price collapse. The stock is down 38% over the past year.

Is SMT in bargain territory?

So is SMT a bargain? Answering this question requires evaluating the prospects of the company’s holdings. And broadly, I don’t believe that Scottish Mortgage’s holdings are good value today, even after their falls.

For example, despite Tesla’s continued fall in recent months, the stock still has a P/E ratio of around 100. This means, at its current rate of profitability, it will take 100 years for the firm’s earnings to cover the value of its shares. This looks particularly expensive, especially when I consider that I can buy a dividend-paying banking giant like Barclays with a P/E ratio of just four.

I also have concerns about Moderna. The vaccine-maker’s future is very unclear as we move to a new era of the pandemic, largely characterised by a less virulent virus and greater willingness to live with its effects. Moderna’s profits are predicted to fall from $12bn in 2021 to just $2bn in 2024 as demand for Covid-19 jabs decreases.

It’s a similar issue for a number of other major SMT holdings. Tencent recently reported falling profitability that compounded concerns about declining growth.

One stock I do like is Chinese Tesla competitor NIO. The stock makes up 2.1% of SMT’s holdings but trades with much more attractive valuations that Tesla. While it’s yet to turn a profit, the EV maker has a P/S ratio of just four.

Should I buy SMT stock?

For me, many of Scottish Mortgage’s holding have still got further to fall. I’ve bought NIO shares for my portfolio, but I’m not too keen on any of SMT’s other major holdings.

The post Down 50%, are Scottish Mortgage shares a bargain growth pick? appeared first on The Motley Fool UK.

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James Fox owns shares in Barclays and NIO. The Motley Fool UK has recommended Barclays 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.