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Stocks 406: Using Morningstar's Rating for Stocks

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1.
Which generally takes more time and expertise to calculate?
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Future cash flows. These require a lot of financial statements, facts, and projections to calculate.
2.
How would a tiny change in a stock's price change its Morningstar Rating?
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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.
3.
The Morningstar Fair Value Estimate represents which of the following?
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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.
4.
If a stock has a Morningstar Rating of 3 stars, it is _______.
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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.
5.
The Morningstar Rating for a stock can change for which of the following reasons?
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A combination of any of these factors. Any one or several of these factors can cause a change in the rating.