What Does Morningstar Think of My Portfolio?
Probably they think I'm an idiot, all considered, and from some comments I receive they certainly wouldn't be alone in that assessment (after all, I've bought shares of wildly speculative bulletin board stocks and pink sheet-traded international shares, as well as a bunch of small cap rapid growers) ... but I was surprised at how many of the companies I own are within a reasonable price range according to Morningstar's analysts.
Morningstar, for those who don't use the service, is primarily value-focused in their analysis of individual stocks. They look closely at things like margin of safety, operational moat, and discounted cash flow -- all of which, of course, are fallible and estimate-based just like all other forward-looking analysis techniques, but I consider them in my analysis as well from time to time.
What Morningstar provides to subscribers is a star rating, just like they have for mutual funds, and a set of price targets -- "fair value", "consider buying below" and "consider selling above" prices.
So I looked at my companies, at least the half or so of them that are covered by Morningstar analysts, and tried to determine how they stack up.
Seven of them are now trading below Morningstar's analysis of "fair value" -- Chesapeake, Chico's, Cemex, Exelixis, Gol, Markel and Vertex (and with the exception of Chico's and Chesapeake, those are all very profitable investments for me already). Nice to know.
Of these, the margin of safety that Morningstar insists upon would prevent buying ... all of them. They're below fair value, but not far enough below to buy. This margin of safety can be dramatically large for the more volatile selections -- more than 30% for Chesapeake, Vertex and Exelixis, for example. Others, like Chico's, are closer to Morningstar's "consider buying" point.
Several of my investments are dramatically overvalued, according to Morningstar. This list includes MEMC Electronic Materials, overvalued by more than 600%, and Google, overvalued by a bit over 50%. I'm guessing my stocks that aren't in their analysis universe, like Akamai and Intuitive Surgical, let alone the really tiny speculative plays, would get similar treatment. Some of the companies that I hold call options on, like Baidu, are also significantly above any Morningstar "buy" point, though many of my holdings are too small to get Morningstar's attention.
On the star rating front, the results are also interesting -- skewed toward the extremes with five "four star" stocks and four "one star" stocks, to go with four 3-star stocks and one that merits two stars. Though I was intrigued to see that a company as volatile and speculative as Exelixis got four stars, I was shocked to see that Google merited one star to Imax's three. Clearly, Morningstar's analysis is very cautious about estimating future growth.
I don't know that there's anything actionable about this for me -- though I am pleasantly surprised that Morningstar's analysts share my optimism for several biotech companies, including Vertex and Exelixis. And I'm less surprised that more traditional value plays like Cemex and Chesapeake are treated quite favorably.
I do like to take account of Morningstar's opinions both before and after I've bought shares in a company, their perspective certainly differs from that of many sell-side analysts, and their service offers an excellent overview of company data. I am unlikely, however, to be as disciplined or focused as they are purely on value propositions, and I certainly take their specific buy and sell prices with a grain of salt. My investment theses tend to rely more heavily on my understanding of a business' prospects and future growth potential, and I temper that with what I hope will be a very long-term perspective that allows a company to grow into its future ... though getting a nice yield or a bargain is certainly always of interest to me as well.
Morningstar, for those who don't use the service, is primarily value-focused in their analysis of individual stocks. They look closely at things like margin of safety, operational moat, and discounted cash flow -- all of which, of course, are fallible and estimate-based just like all other forward-looking analysis techniques, but I consider them in my analysis as well from time to time.
What Morningstar provides to subscribers is a star rating, just like they have for mutual funds, and a set of price targets -- "fair value", "consider buying below" and "consider selling above" prices.
So I looked at my companies, at least the half or so of them that are covered by Morningstar analysts, and tried to determine how they stack up.
Seven of them are now trading below Morningstar's analysis of "fair value" -- Chesapeake, Chico's, Cemex, Exelixis, Gol, Markel and Vertex (and with the exception of Chico's and Chesapeake, those are all very profitable investments for me already). Nice to know.
Of these, the margin of safety that Morningstar insists upon would prevent buying ... all of them. They're below fair value, but not far enough below to buy. This margin of safety can be dramatically large for the more volatile selections -- more than 30% for Chesapeake, Vertex and Exelixis, for example. Others, like Chico's, are closer to Morningstar's "consider buying" point.
Several of my investments are dramatically overvalued, according to Morningstar. This list includes MEMC Electronic Materials, overvalued by more than 600%, and Google, overvalued by a bit over 50%. I'm guessing my stocks that aren't in their analysis universe, like Akamai and Intuitive Surgical, let alone the really tiny speculative plays, would get similar treatment. Some of the companies that I hold call options on, like Baidu, are also significantly above any Morningstar "buy" point, though many of my holdings are too small to get Morningstar's attention.
On the star rating front, the results are also interesting -- skewed toward the extremes with five "four star" stocks and four "one star" stocks, to go with four 3-star stocks and one that merits two stars. Though I was intrigued to see that a company as volatile and speculative as Exelixis got four stars, I was shocked to see that Google merited one star to Imax's three. Clearly, Morningstar's analysis is very cautious about estimating future growth.
I don't know that there's anything actionable about this for me -- though I am pleasantly surprised that Morningstar's analysts share my optimism for several biotech companies, including Vertex and Exelixis. And I'm less surprised that more traditional value plays like Cemex and Chesapeake are treated quite favorably.
I do like to take account of Morningstar's opinions both before and after I've bought shares in a company, their perspective certainly differs from that of many sell-side analysts, and their service offers an excellent overview of company data. I am unlikely, however, to be as disciplined or focused as they are purely on value propositions, and I certainly take their specific buy and sell prices with a grain of salt. My investment theses tend to rely more heavily on my understanding of a business' prospects and future growth potential, and I temper that with what I hope will be a very long-term perspective that allows a company to grow into its future ... though getting a nice yield or a bargain is certainly always of interest to me as well.
This article posted by One Guy @ 2/23/2007 12:07:00 PM 0 comments
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