How Can You Determine What a Stock is Really Worth?

Four key components drive the Morningstar rating: our assessment of the firm’s economic moat, our estimate of the stock’s fair value, our uncertainty and the current market price

Michael Holt, CFA 2 November, 2015 | 2:30PM
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Morningstar analysts believe that a company’s intrinsic worth results from the future cash flows it can generate. The Morningstar Rating for stocks identifies stocks trading at a discount or premium to their intrinsic worth – or fair value estimate, in Morningstar terminology. Five-star stocks sell for the biggest risk-adjusted discount to their fair values, whereas one-star stocks trade at premiums to their intrinsic worth.

Four key components drive the Morningstar rating: our assessment of the firm’s economic moat, our estimate of the stock’s fair value, our uncertainty around that fair value estimate and the current market price. This process ultimately culminates in our single-point star rating. Underlying this rating is a fundamentally focused methodology and a robust, standardised set of procedures and core valuation tools used by Morningstar’s equity analysts.

What is an Economic Moat?

The concept of the Morningstar Economic Moat Rating plays a vital role not only in our qualitative assessment of a firm’s investment potential, but also in our actual calculation of our fair value estimates. We assign three moat ratings – none, narrow, or wide – well as the Morningstar Moat Trend Rating – positive, stable, or negative – to each company we cover.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Michael Holt, CFA  Michael Holt, CFA, is a senior stock analyst with Morningstar.