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By Pat Dorsey, CFA | 01-26-2010 12:20 PM

Our Stock-Picking Track Record

Pat Dorsey takes a look back at the performance of our calls through the downturn and recovery, plus how our star ratings on wide-, narrow-, and no-moat stocks have played out.

Pat Dorsey: Hi, I'm Pat Dorsey, director of equity research at Morningstar. At Morningstar's Equity Research Department, we're sometimes accused of taking a bit of an academic focus towards equity research. We spend a lot of time on competitive analysis and cash flow projections, but at the end of the day, the purpose is to pick stocks that go up.

So, the question is, did we do this? How has our performance been in 2009 and over the past few years? We recently published an article looking at our performance in '09 and in the past several years. I wanted to recap some of the highlights for you.

One of the first ways we can look at our performance in general is basically comparing how cheap we thought stocks were in aggregate to how the market has done. On that score, we've done OK.

In '07 and '08, we thought stocks were mildly overvalued. In hindsight, they were more overvalued then we had projected them to be, but at least we weren't pounding the table and saying, "Go out and put all your money into the equity markets."

What we did get right was calling the market as significantly undervalued in late '08 and early '09 when the median price-to-fair value of all the stocks that we cover reached as low as about 0.6, meaning that we thought the median stock in our coverage universe was about 40% undervalued in late '08 and early '09. Of course, that turned out to be a pretty good call.

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