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A Cheap Stock and an Expensive One

Some insight into how we come up with fair values.

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When Morningstar estimates a fair value for a stock, we don't just pluck our fair values out of thin air. A big chunk of our analysts' time is spent modeling the companies they follow--a fancy way of saying they forecast several years' worth of sales, profit margins, and cash flows to come up with a good estimate for what a rational investor would pay for each stock.

To give you a taste of how it works, let's peek inside the fair values of two stocks, one of which (Toys 'R' Us (TOY)) we think is a bargain, and the other (Intel (INTC)) we think is too expensive.

Toys 'R' Us: 5 Stars
Morningstar analyst T.K. MacKay  estimates that Toys 'R' Us is worth about $27 per share, whereas the stock is currently trading for less than $20--enough of a spread to earn a 5-star rating.

Haywood Kelly, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.