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Our Picks

Picking Stocks with the Star Rating

The star ratings can change quickly--here's how to cope.

If you've followed our stock star ratings since they launched in August, you've noticed they change--sometimes frequently. Among the 500 or so stocks we rate, we've had about 2,000 rating changes in the first two-and-a-half months. As in investor, how should you interpret these changes?

First of all, it doesn't mean our views of companies are constantly changing. We're actually not a fickle bunch. Sure, our analysts will change their forecasts--of sales growth, future profits, and any of a number of financial indicators--as conditions warrant. They monitor their companies closely, and as they digest new information, they incorporate that into their models. That's a big part of their job. Such changes alter our fair-value estimate of the stock, and sometimes push a stock past one of our cutoffs:

  • Five Stars: Fair value is at least 30% greater than stock price
  • Four Stars: Fair value is between 10% and 30% above stock price
  • Three Stars: Fair value is within plus or minus 10% of the stock price
  • Two Stars: Fair value is between 10% and 30% below the stock price
  • One Star: Fair value is 30% less than the stock price