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1.
When Morningstar Ratings for stocks change, the changes are usually based on _______.
Changes in stock prices. The assessments don't change much, but the stock prices naturally do.
2.
What is a drawback of using ratios (such as price/earnings ratio or price/book ratio) to value stocks?
They require context to understand. For example, there may be a disconnect between the ratio and the market price of the stock.
3.
If a stock has a Morningstar Rating of 3 stars, it is _______.
Fairly valued. Stocks that are trading very close to our analysts' fair value estimates will usually get 3-star ratings. Assuming that the stock's market price and fair value eventually converge, 3-star stocks should offer a "fair return." A fair return is one that adequately compensates you for the riskiness of the stock.
4.
The Morningstar Fair Value Estimate represents which of the following?
An estimate of how much a stock should be worth today based on how much cash flow the company is expected to generate in the future. Morningstar's Fair Value Estimate represents how much a stock should be worth today based on how much cash flow the company is expected to generate in the future. The Morningstar Fair Value Estimate should not be confused with a target price, which is how much the market might be willing to pay for a stock. To arrive at a fair value, Morningstar analysts use a detailed discounted cash-flow model that factors in projections for the company's income statement, balance sheet, and cash-flow statement. It is not adding projected earnings growth to a stock's current trading price.
5.
An estimate of a company's fair value involves determining how much one would pay today for all the sales generated by the company in the future.
False. Rather than sales, the estimate uses streams of excess cash.
