How Morningstar ***** Rates Stocks
Morningstar star ratings for stocks are based on the stock’s price/fair value ratio and fair value uncertainty rating. To earn a 5-star rating, a low-uncertainty stock needs to trade at a 20% discount to MS fair value estimate, while the same stock would earn a 1-star rating if it traded at a 25% premium to fair value. These discounts and premiums widen as the uncertainty rating increases. A 3-star rating reflects our view that a stock is more or less fairly valued, while 2- and 4-star ratings reflect moderate levels of overvalu- ation or undervaluation, respectively.
Morningstar star ratings for stocks are based on the stock’s price/fair value ratio and fair value uncertainty rating. To earn a 5-star rating, a low-uncertainty stock needs to trade at a 20% discount to MS fair value estimate, while the same stock would earn a 1-star rating if it traded at a 25% premium to fair value. These discounts and premiums widen as the uncertainty rating increases. A 3-star rating reflects our view that a stock is more or less fairly valued, while 2- and 4-star ratings reflect moderate levels of overvalu- ation or undervaluation, respectively.
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