Stocks that have beaten the market over a given period of time aren't necessarily overpriced. Outperformance and overvaluation aren't always arm in arm. For instance, we recently looked at stocks that our analysts covered that had returned more than 20% this year but were still undervalued by our metrics. Five names made the list.
How can that be? At Morningstar, we base our fair value estimates on our expectation of future cash flows; we also take into account the predictability of those cash flows, represented by our uncertainty ratings. As such, recent stock performance doesn't influence our fair value assessment. Long-term intrinsic value is key. Stocks that have rallied may not have reached our estimate of their long-term intrinsic value.
Susan Dziubinski does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.