In investing, research is an essential determining factor when picking stocks. Doing research allows investors to find undervalued stocks that are suitable investments.
A prominent source of research reports is Morningstar research reports. However, while most research reports share similar approaches, they’re not the same.
Here is your guide to understanding Morningstar research reports.
Elements of the Rating
Every stock is given a rating, the higher the rating the better. The ratings given to each stock help investors determine stocks that are of good value. The rating is determined by 3 main factors:
- A stock’s current price
- An estimate of the fair value
- Uncertainty of the fair value
The 3 factors go hand in hand in order to determine a stock’s rating. The fair value estimate is determined based on expected future cash flows i.e. how much money the company will make in the coming years. Once that is determined, the fair value is compared to the current market price. The lower the fair value is compared to the market price, the higher the rating it will receive. There is an additional factor and that is uncertainty. Uncertainty gives a measure of the predictability of a company’s future cash flows. Companies with low uncertainty levels require a lower margin of safety, making it easier to receive a higher rating and vice versa.
In App
Under every US stock on the Thndr App, users will find an analyst rating that assesses the company’s fair value, in addition to a “what is good” and “what is bad” segment about the company.
The analyst rating is derived based on Morningstar’s research on the company, and the company can be given a rating ranging from significantly undervalued to significantly overvalued.
The “what is good” and “what is bad” segments very briefly look at a company’s strategy that may either have a positive (good) impact on the company or a negative (bad) impact on the company.
Sections of the Report
The first section of the report predominantly reports news related to the company, indicating its latest performance and current business strategy.
The second section portrays a graphic representation of its price vs its fair valuation while portraying similar competitors in the same industry and their current value against their fair valuations. This section gives a reasonable representation of how the company is performing in comparison to its competitors.
The third section provides readers with the financials of the company, giving investors a comprehensive view of the company and its past performances throughout the year. This segment of the report indicates the financial position of the company to investors, providing investors with numerous financial ratios that they may use to compare to other companies in the industry
The fourth section of the report is an explanation of the methodology of the research. This is to provide transparency on how the companies were analyzed.
Advice
Reading research reports may be overwhelming. However, the key to understanding research reports is to take the time to understand the different factors that go into analyzing a company, following the logic of the research provided, and then coming to a conclusion regarding a certain stock: is it a good investment?
*This is not investment advice, & you should do your own research before making investment decisions.
