Course 401: The Morningstar Rating for Stocks
What Is Fair Value?
In this course
1 Introduction
2 What Is Fair Value?
3 How We Assign Stars
4 Final Points

The core idea is simple. Most any investment, whether it's buying a home or purchasing a stock or bond, boils down to an initial outlay followed by (the investor hopes) a stream of future income. The trick is deciding on a fair price to pay for that stream of future income.

Let's say a stock trades for $20 per share. If you crunch the numbers--projected sales growth, future profit margins, and so on--you might estimate the stock's fair value per share to be $30. That's a good deal. You pay $20 to buy the stock, and in return you receive a stream of income valued at $30. If instead of $30 the fair value per share had been $10, you're looking at an expensive stock.

No number, fair value included, can mechanically pick winning stocks. But the Morningstar Rating for stocks allows us to drain the most expensive stocks from the lake of possible investments, thereby creating a wading pool of possible bargains.

Next: How We Assign Stars >>


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