Suddenly, Many 5-Star Stocks to Choose From

When prices drop, stocks become more attractive. That simple relationship drives the Morningstar Rating for stocks.

As the market has dropped over the past month, we've seen the number of 5-star stocks--our highest rating--double. As of Friday, we now have 116 5-star stocks, up from about 50 as of this summer.

The move is even more dramatic since the beginning of the year. At the beginning of 2005, only 2% of the stocks we covered earned 5 stars. Today, the percentage is 7%.

By Wall Street standards, giving only 7% of your coverage universe your highest rating would count as extreme and utter pessimism. By our standards, though, 7% represents a moderate degree of optimism. It's the most potential bargains we've seen in well over a year. (See the table below for a more detailed breakdown of our star-rating distributions over the past year.)

Star Rating Distribution
Date	1 Star (%)	2 Stars (%)	3 Stars (%)	4 Stars (%)	5 Stars (%)
09/30/04	26	12	43	14	5
12/31/04	37	15	40	6	2
03/31/05	27	11	45	12	4
06/30/05	27	11	45	12	4
10/28/05	21	9	46	17	7

As you can see in the next table, the median stock we cover trades right at our fair value estimate. This means that out of the 1,600-plus stocks we cover, half trade above fair value and half below. The more interesting statistics are the median price/fair value ratios broken out by moat. A disproportionate share of cheap stocks belong to high-quality companies. (You can see all this graphically in our  Market Valuation Graph.)

Price/Fair Value by Moat Rating
	Median Price/Fair Value	52-Week High/Low	All-Time High/Low
Morningstar Coverage Universe	1.01	1.14 - 1.00	1.14 - 0.78
Wide Moat	0.93	1.00 - 0.91	1.06 - 0.81
Narrow Moat	0.98	1.11 - 0.97	1.11 - 0.79
No Moat	1.09	1.27 - 1.07	1.27 - 0.75
Data as of 10-28-05.

For both wide-moat and narrow-moat universes, more stocks are undervalued than overvalued. And across all subgroups, stocks trade at price/fair value ratios near their 52-week lows. Among our 156 wide-moat companies, for example, 23 trade within 5% of their 52-week low. (To see a complete list,  click here.)

This doesn't mean stocks can't fall further. They certainly can. Since we launched our rating system in 2001, the low point of the median price/fair value ratio was 0.78. That's 23% below current levels. Even wide-moat stocks, which currently sport a median price/fair value ratio of 0.93, have been as low as 0.81 before. Prices can deviate significantly from our fair value estimates either because those estimates are off, or (we hope) because the market swings up and down more violently than do underlying business values.

New 5-Star Stocks
What we can say with confidence is that the average stock is a better deal today than it was a month ago. If you're the kind of investor who thinks stocks become more attractive when they fall--unfortunately, it's human nature to like stocks more after they rise--then there's a lot to choose from.

Here are three stocks that have hit 5 stars over the past month. Premium Members can view the complete list of our 5-star stocks by  clicking here.  

 Directv Group 
Business Risk: Average
Economic Moat: Narrow
From senior analyst Michael Hodel: "Directv and rival  EchoStar  have done a fantastic job of capitalizing on many consumers' disdain for their local cable company. The firms have each added about 4 million customers in the past three years while cable customer growth has stagnated. Satellite providers have used strong customer service and aggressive marketing to capture virtually all of the growth in the pay-television industry."

 Golden West Financial 
Business Risk: Below Average
Economic Moat: Narrow
From analyst Ryan Batchelor: "We think Golden West's results will be negatively affected if the yield curve stays flat or inverts (short-term rates become higher than long-term rates) for a prolonged period of time. We don't believe, however, that the long-term value of the firm would be severely impacted because it has a solid business model and a superb management team."

 TJX (TJX)
Business Risk: Average
Moat: Narrow
From analyst Kimberly Picciola: "With prices that are 20%-60% below those at department stores and specialty retailers, fashion-craving, value-conscious consumers flock to TJX for brand-name apparel and home goods. It is the nation's largest off-price retailer, which gives it a scale advantage over its competitors."