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1.
What does Morningstar prefer to use to value stocks?
Future profits. Using future profits is easier to understand and requires less context than using ratios.
2.
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.
3.
How would a tiny change in a stock's price change its Morningstar Rating?
It likely would not change it. There is a buffer zone built into the ratings to prevent tiny changes from leading to a new rating.
4.
The Morningstar Rating for stocks _______.
Is analyst-driven. Morningstar estimates a company's fair value by determining how much it would pay today for all the streams of excess cash generated by the company in the future. It arrives at this value by forecasting a company's future financial performance using a detailed discounted cash-flow model that factors in projections for the company's income statement, balance sheet, and cash-flow statement. The result is an analyst-driven estimate of the stock's fair value.
5.
Five-star stocks should generate a return _______.
Greater than the company's cost of equity. Five-star stocks should offer investors a return that is greater than the company's cost of equity. The cost of equity is often called the "required return," because it represents the return an investor requires for taking on the risk of owning a stock. Since 5-star stocks are considerably undervalued, we expect investors will enjoy high returns that significantly exceed the risks associated with investing in the stock.
