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

Note how our fair-value analysis differs from just looking for stocks with low price/earnings or low price/book-value ratios. A company can have a high P/E or P/B but still be cheap based on fair value. If a computer company can grow fast enough, its stock will deserve a high P/E, and it might even be a bargain. Looking at future profits allows for a more sophisticated approach to stock valuation.

Just as important, the Morningstar Rating for stocks does not attempt to take investor sentiment into account, and therefore does not factor in a phenomenon like "momentum" (whether a stock is currently rising or falling--which some investors use as a short-term trading signal). We don't deny that investor sentiment can play a very large role in the near-term value of a stock. But we believe that the long-term value of a stock is tied to how much value the company generates for its shareholders.

True investing means buying a stake in a business at a good price. It isn't hopping on the latest hot concept hoping for a quick profit.

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