Course 406: Using Morningstar's Rating for Stocks
What Causes a Star Rating to Change?
In this course
1 Introduction
2 What Is Fair Value?
3 How Do We Assign Stars?
4 What Causes a Star Rating to Change?
5 A Different Valuation Approach&
6 The Bottom Line

Morningstar's stock star ratings are updated daily, and therefore they can change daily. The ratings can change because of a move in the stock's price, a change in the analyst's estimate of the stock's fair value, a change in the analyst's assessment of a company's business risk, or a combination of any of these factors. The Morningstar Rating for stocks includes a small buffer around the cutoff between each rating to reduce the number of rating changes produced by random market "noise." If a $50 stock moves up and down by $0.25 each day over a few days, the buffer will prevent the star rating from changing each day based on this insignificant change.

It is important to note that our fair value estimates do not change very often, but the market prices do. Therefore, stocks often gain or lose stars based just on movement in the share price. If we think a stock's fair value is $50, and the shares decline to $40 without a change in the intrinsic value of the business, the star rating will go up. Our estimate of what the business is worth hasn't changed, but the shares are more attractive as an investment at $40 than they were at $50.

Next: A Different Valuation Approach& >>


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