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HomeftseScottish Mortgage Trust Discount to NAV is Widening: Is it a Buy?

Scottish Mortgage Trust Discount to NAV is Widening: Is it a Buy?

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The Scottish Mortgage Trust (LON: SMT) has seen its share price struggle this year while other technology stocks have soared. With a drop of over 13% from its peak this year and over 55% from its all-time high, the trust has experienced a significant decline.

In contrast, the tech-heavy Invesco QQQ ETF has seen its stock surge by over 32% in the past 12 months, driven by what is known as the Magnificent 7. Similarly, the SPDR S&P 500 ETF (SPY) has risen by over 11.41%.

Scottish Mortgage Trust is not the only investment trust facing challenges. Recent data shows that the average UK trust is now trading at a 17% discount to its asset value. Additionally, the FTSE All-Share Closed End Investments Index has dropped by over 6.5% this year.

The discount to Net Asset Value (NAV) for Scottish Mortgage Trust has been worsening in recent years. Currently standing at -17%, it is a few points above this month’s low of -21.25. This indicates that the market price of the trust is significantly lower than the net asset value of its holdings.

Scottish Mortgage Trust holds stakes in various well-known companies, including ASML, a Dutch company that manufactures machines used in semiconductor manufacturing. While ASML’s stock price has risen by over 63% from its lowest point in 2023, it remains below its 2022 highs due to ongoing export control restrictions and anticipated competition from Canon.

The trust also owns a stake in SpaceX, which prominent investor Ron Baron believes will be valued at over $500 billion by 2030. SpaceX owns Starlink, a company that is generating billions of dollars and has significant government and corporate contracts.

Other major portfolio companies for Scottish Mortgage Trust include PDD Holdings, the parent company of fast-growing e-commerce company Temu, and Bytedance, the owner of TikTok. The trust also holds stakes in Mercadolibre, The Brandtech Group, Ferrari, Nvidia, and Spotify.

However, Scottish Mortgage Trust faces challenges as some of its portfolio companies have struggled. Moderna’s share price has dropped by over 58% in the past year as demand for Covid-19 vaccines has weakened. In Germany, Zalando has underperformed due to declining demand for food delivery and rising costs. Other struggling portfolio companies for Scottish Mortgage Trust include HelloFresh, Adyen, Nio, Ginkgo Bioworks, and Meituan.

Another challenge for the trust is that a portion of its portfolio remains in the private market, which can be highly illiquid, particularly in an era of high-interest rates.

Looking at the daily chart, Scottish Mortgage Trust’s stock price has been moving sideways in recent months and is currently consolidating at the 50-day and 25-day Exponential Moving Averages (EMA). The shares have formed a symmetrical triangle, nearing the confluent level. Additionally, the Average True Range (ATR) has reached its highest point since March, indicating increased volatility. As a result, the outlook for the stock is neutral, with key support and resistance levels at $635 and $750. However, it may be wise to consider investing in Invesco QQQ instead of Scottish Mortgage Trust due to the latter’s significant discount.

The widening discount to NAV for Scottish Mortgage Trust raises questions about whether it presents a buying opportunity. Investors will be closely watching how the trust navigates these challenges and whether it can regain its footing in the technology sector.

More detail via Investing.com UK here… ( Image via Investing.com UK )

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