Morningstar Rating for Stocks

The Morningstar Rating for stocks—also called the star rating—is a forward-looking, analyst-driven measure of a stock's current price relative to the analyst's estimate of what the shares are worth. Stock star ratings indicate whether a stock is cheap, expensive, or fairly priced compared with the analyst's assessment of intrinsic value.

To rate a stock, an analyst estimates what they think it's worth (also called the Morningstar Fair Value Estimate) using a detailed, long-term cash flow forecast for the company. A stock's star rating depends on whether its current market price is above or below that fair value estimate. Those stocks trading at large discounts to their fair values receive the highest ratings (4 or 5 stars). Stocks trading at large premiums to their fair values receive lower ratings (1 or 2 stars). A 3-star rating means the current stock price is fairly close to the analyst's fair value estimate.

More detailed definitions of each star rating are as follows:

• 5 stars: We believe appreciation beyond a fair risk-adjusted return is highly likely over a multiyear time frame. Our analysis indicates that the current market price represents an excessively pessimistic outlook, which limits downside risk and maximizes upside potential.
• 4 stars: We believe appreciation beyond a fair risk-adjusted return is likely over a multiyear time frame.
• 3 stars: We believe investors are likely to receive a fair risk-adjusted return (approximately cost of equity).
• 2 stars: We believe investors are likely to receive a less than fair risk-adjusted return.
• 1 star: We believe there is a high probability of undesirable risk-adjusted returns from the current market price over a multiyear time frame. Our analysis indicates that the market is pricing in an excessively optimistic outlook, which limits upside potential and leaves the investor exposed to capital loss.