Morningstar's Approach
to Stock Analysis
We evaluate stocks for
what they truly are—pieces
of a business. Ultimately it's
a company's financial
performance—its financial
strength, growth rate,
and returns on capital—that
determines its stock price.
Our analysts focus on
determining the value of a
business, its risks, and
whether the stock price accurately reflects both the
value and risk. In rating
stocks, we look for superior
businesses that trade at
discounts to their fair values.
The market, of course,
doesn't always agree with us,
so sometimes our
recommendations are out of
step with consensus thinking.
But we believe this approach
is the most sensible way
to create wealth over the
long term.
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| This philosophy of
fundamental research is the
foundation for our valuation
model. We believe that: |
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The key to a good business
is an economic moat—a sustainable advantage
that keeps competitors at
bay and protects profits. |
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Investors should always
look for a margin of safety.
The riskier the stock, the
greater the margin of safety
that we demand.
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How much capital a
company invests and what
it earns on that capital
drive shareholder value.
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Free cash flow—not reported
earnings—is what counts. |
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As Warren Buffett has said,
"Growth is always a
component in the calculation
of value—sometimes a
positive, often a negative."
If a company can't earn
its cost of capital, growth
destroys value instead of
creating it.
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Competitive advantages
disappear over time.
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It's dangerous to assume
that the future will be better
than the past.
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A company's financial
strength is paramount.
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