Changes to Morningstar research recommendations

You will now notice a change with the Morningstar research recommendations in the Daily Share Tracker emails. The previous buy/accumulate/hold/reduce/sell ratings for Australian and New Zealand stock and credit securities have now been replaced with a one-to-five Star Ratings for stocks system used by Morningstar globally.

How does the Star Ratings system work?

The Star Rating represents a forward-looking opinion of a stock’s valuation and is calculated using the same logic as the previous word-based recommendations. Morningstar’s Star Rating conveys only an opinion on valuation.

The meaning of the different Star Ratings are:

starstarstarstarstar (previously ‘Buy’) indicates an investment idea with a high probability of significant risk-adjusted appreciation from the current market price during a multi-year time frame. Scenario analysis developed by Morningstar analysts indicates that the current market price represents an excessively pessimistic outlook, limiting downside risk and maximizing upside potential.

starstarstarstar (previously ‘Accumulate’) indicates that appreciation beyond a fair risk-adjusted return is likely.

starstarstar (previously ‘Hold’) indicates that investors are likely to receive a fair risk-adjusted return (approximately cost of equity).

starstar (previously ‘Reduce’) indicates that investors are likely to receive a less than fair risk-adjusted return and should consider directing their capital elsewhere, in Morningstar’s opinion.

star (previously ‘Sell’) indicates a high probability of undesirable risk-adjusted returns from the current market price over a multi-year time frame. Morningstar’s scenario analysis indicates the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

How often are the Star Ratings for stocks calculated?

They’re calculated daily, and subject to change based on the current share price relative to Morningstar’s fair value estimate, after adjustment for an appropriate margin of safety.

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If you have any questions or would like more information, please contact us on 13 13 31, between 8am and 7pm (Sydney time), Monday to Friday.

Published: 23 March 2018