Uncertainty Is a Part of Stock Investing. Here’s How to Account for It

On a recent episode of The Morning Filter podcast, Morningstar Chief US Market Strategist Dave Sekera and co-host Susan Dziubinski answered questions from their audience mailbag. Here’s an excerpt of a conversation that took place in November 2025.

Susan Dziubinski: Guillermo had a question about Morningstar’s Uncertainty Rating. He observes that you often suggest that having a High Uncertainty Rating isn’t as good as having a Medium or a Low Uncertainty Rating, but he wants to know specifically about High Uncertainty 4- and 5-star-rated stocks. Is High Uncertainty here in these cases still a negative, and if so, why?

Dave Sekera: I think this is probably my fault in that I haven’t necessarily communicated correctly to our audience what the Uncertainty Rating is and how it’s used. So, I want to do a quick little teach-in here.

Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company’s intrinsic value. Essentially, what we’re doing here is we’re describing the confidence that we have in being able to assign a fair value for a given stock.

For example, for a company that we would rate with a Low Uncertainty, we have much higher confidence in our ability to be able to closely forecast the future free cash flow that the company is going to generate, whereas with a High Uncertainty stock, a much lower confidence in that forecast.

The Uncertainty Rating assigns the ranges that we use to derive the star rating. For a lower-uncertainty-rated company, we require less margin of safety below the fair value before it becomes a 4-star or a 5-star-rated stock, and conversely, we won’t let that stock trade too much above fair value before it starts to hit that 2-star, 1-star territory.

For High Uncertainty, we are going to want a much greater margin of safety below our intrinsic valuation before we start to think that stock looks attractive, but we’ll also let that stock run well above our fair value to capture that additional upside before it hits 2 stars or 1 star.

We’re trying to use uncertainty as a risk-adjusted way to be able to assign our star ratings. As we’ve talked about in the past, one of the traders I used to work for, Jimmy, the old Brooklyn trader, in his best accent, used to say, “Hey, everything’s always got a price.” So, it’s not that High Uncertainty is bad; it’s just that you want to make sure that you’re getting paid for that additional risk, that you have much more margin of safety to be able to protect you to the downside if you hit those periods of more volatility in the marketplace, or conversely, if we’re wrong with our valuations in our analysis and maybe we overvalued the stock. At least having that wider margin of safety does help protect to the downside.

And then lastly, I’d also note, too, I think investors need to have a higher risk tolerance for investing in those stocks with higher Uncertainty Ratings because, of course, you’re going to just expect those stocks to have greater volatility, so while they certainly can provide greater upside, they also have more downside risk as well.

I think investors should always start their portfolios with good diversification among stocks and fixed income, and then, within that equity portion of their portfolios, start with a good basis of ETFs or mutual funds to get that broad diversification before investing in individual stocks, especially those with High and Very High Uncertainty Ratings.