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What is the Morningstar Star Rating for Stocks? - YouTube
Channel: Morningstar Europe
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welcome to Morningstar's asked the
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expert I'm Holly black with me is Alex
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Morozov he's head of European equity
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research at Morningstar hello hey Kali
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so whenever I open up a Morningstar
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analyst report on a stock I see stars a
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morning star star rating what does that
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tell me well the star rating especially
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for for users of Morningstar research
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especially funds research when they see
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only C star rating they immediately
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assume well that's the Morningstar funds
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analysts opinion of funds prior
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performance for stock rating stars are
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actually an indicator of what our
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analysts think in terms of how
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attractive the stock as an investment
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right now so think of the star ratings
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as a equivalent of some of those
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traditional research providers by cell
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rating so ranging from a 5 star being
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the most undervalued stocks to 1 stars
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being the stocks that are materially
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overvalued relative to our fair value
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estimate so this is all centered about
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where the shares are trading today
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versus a fair value estimate which is
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what you think they're worth right
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that's exactly what it is maybe a little
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element a little wrinkle in that is
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there's also what we call an uncertainty
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ratings so something that's more
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commonly known as maybe a risk rating of
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a business how likely are those earnings
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to be very volatile over the next five
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ten years or free cash flows in our case
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so think of a star rating is taking the
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intrinsic value what we think that the
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company's worth the fair value estimate
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compared to stock stock price and then
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adjusted for this for this risk rating
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of a business and that's how you arrived
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at ultimately those star ratings so if
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you're an investor and you open the
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Morningstar company report and you say
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well Morningstar thinks it's a five star
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stock what should I do that well that
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most likely means that given the
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uncertainty of this business uncertainty
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profile of this business
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Morningstar thinks that is one of the
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most attractive investment opportunities
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right now on the flip side you take a
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one star stock for example yeah you
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might be overpaying materially I mean
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that Tesla is no
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in the news right now and the the stock
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prices very very very lofty but one star
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indicates that the car analysts think
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it's very overvalued so what does it
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take for a star rating to move or
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something ever go from a five to a one
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or is it a lot more gradual great well
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there are a couple couple factors that
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could result in star rating changing
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what's say from five stars to four stars
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one if our analysts actually change the
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fair value estimate and there are a
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couple reasons why they what analysts
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might change their fair value estimate
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for example if they think that the
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company is performing better than they
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expected or worse than expected maybe
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the analysts decide to change the mote
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rating of the company so the economic
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moat rating pertains to our assessment
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of the competitive advantage of the
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business and let's say that there are
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some industry developments some massive
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disruptions that are analysts say you
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know what the economic the economic mode
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rating or competitive advantage is not
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as strong as we previously thought it
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would and since the economic moat rating
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actually specifically implicitly flows
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into our fair value estimates that could
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also result in any change to fair value
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estimate so that's one reason the second
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reason and that's that's the reason that
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probably is more common is that the
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stock price actually moves so what our
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analysts tried to tell investor is that
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this particular company is worth X and
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the the wider the discount the greater
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the star rating so when the stock price
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starts moving towards there towards our
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fair value estimate which is which is
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great if you're an investor the star
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rating starts to shrink so it goes from
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five stars to perhaps three stars over
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time and maybe even one star if that
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wildly overshoots our fair value
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estimate so if you're an investor you
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really do want to see that development
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assuming that's for the reasons that the
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stock is appreciating rather than the
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fair value estimate is getting cut and
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what about three star rating right in
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the middle so it's quite clear what one
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in five would tell me as an investor but
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all the story tell me well the the way
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our star rating works is that we say
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that the three star stock is I would say
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considered to be fairly valued we're not
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saying that an investor should not look
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at those those securities what we are
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saying however
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that the stock is probably gonna return
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somewhere in line with what the market
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should return over time so at 3 3 star
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stocks could still be a good investment
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depending on your required returns but I
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wouldn't consider it to be a very
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attractively priced so maybe an
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equivalent to a hold if you owe so well
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thank you so much for your time yeah my
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pleasure and thanks for joining us
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