According to Morningstar, star ratings are assigned based on an analyst's assessment of a stock's market price compared to its estimated fair value. The star rating is also adjusted for any risk. Morningstar assigns five different star levels to stocks.Continue Reading
Morningstar star ratings look at how attractive a specific stock appears to investors as an investment opportunity. Morningstar states that stocks that trade at a larger discount to the fair value estimate receive a higher rating than those that trade at large premiums to the fair value estimates. Stocks that are trading close to the fair value estimates are generally given a three-star rating. However, star ratings may vary slightly based on the quality of the company in question. An example of this is outlined as a high-quality business having a smaller discount requirement because analysts feel more confident in fair values and overall cash flow projections.
Because Morningstar updates its star ratings on a daily basis, a stock's star rating may change from one day to the next. While this doesn't happen on a regular basis, there are a number of reasons that Morningstar may change a stock's star rating, including a change in the stock price. Other circumstances that can result in a change of a stock's star rating include a change in the estimated fair value, a change in the risk assessment of a company or a combination of these three factors. However, Morningstar does include a small buffer between ratings to account for insignificant changes to the stock price.Learn more about Corporations