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Kathy Panagopouloskathy.panagopoulos@morningstar.com
Morningstar Rating for Stocks: Overview

CHICAGO, Aug 08, 2001 – What: Morningstar, Inc., a leading provider of independent investment information, is introducing a new tool for identifying undervalued stocks, the Morningstar RatingTM for stocks. The rating is based on Morningstar stock analysts' estimates of a stock's fair value relative to its current market price. Approximately 500 stocks are rated from one to five stars, and the ratings are updated daily. 

Why: This new rating gives investors a simple tool for identifying undervalued stocks, which is at the heart of most successful investing strategies. The Morningstar Rating for stocks is investor-friendly, easy to understand, and meaningful.

Where: The Morningstar Rating for stocks is included in the Stock Analyst Reports available with Morningstar.com Premium Membership at http://www.morningstar.com

The Methodology: Morningstar's analysts estimate a company's growth rate, profitability, and asset efficiency. These inputs are used to project future cash flows, which are then discounted back to the present to arrive at a fair value. The fair value is compared with the current market price, and stars are assigned according to this relationship. Morningstar has also developed an associated risk measure which identifies stocks as high, medium, or low risk, based on company and industry factors.

Comparing Fund and Stock Ratings 

Morningstar Rating for funds is: 

  • Based on historical performance 
  • Backward-looking                     
  • Strictly quantitative                     
  • Calculated once per month 

Morningstar Rating for stocks is: 

  • Based on estimated valuation                     
  • Forward-looking                     
  • Includes analyst opinions with quantitative inputs                     
  • Calculated daily

The Rating Scale 

5 stars = Fair value is 30% or more above the current market price
4 stars = Fair value is 10% to 30% above the current market price
3 stars = Fair value is 10% above or below the current market price
2 stars = Fair value is 10% to 30% below the current market price
1 star = Fair value is 30% or more below the current market price

Some examples of well-known companies and their Morningstar Ratings*: 

Philip Morris:  5 stars
Qwest Communicaitons:  5 stars
Sun Microsystems:  5 stars
AOL Time Warner: 4 stars
Bristol-Myers Squibb: 4 stars
Enron: 4 stars
General Electric: 3 stars
Microsoft: 3 stars
Wal-Mart:  3 stars
Dell:  2 stars
Home Depot: 2 stars
Walt Disney: 2 stars
eBay: 1 star
Krispy Kreme:  1 star
Qualcomm:  1 star

Other Morningstar Stock Tools 

  • Morningstar Stock Grades: Letter grades that rate a company's growth, profitability, and financial health. These are quantitative descriptions of a company's historical performance.
  • Tortoise and Hare Portfolios: Value- and growth-oriented portfolios that synthesize top money managers' techniques with Morningstar's approach to help provide better direction for stock investing for the long term. 
  • Stock Quicktake® Reports: Data and research on more than 7,000 stocks that summarizes performance, growth, risk, and volatility.

*Ratings for stocks calculated on 8/7/01 

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