Here is how you can quickly spot value stocks!

Investors can quickly spot undervalued stocks using Morningstar's Quantitative Equity Ratings. A look at the features of the tool with sample illustrations.

Published: November 16, 2019 at 8:18 am

Last Updated on December 29, 2021 at 5:12 pm

Here is how investors can quickly spot undervalued stocks using Morningstar’s Quantitative Equity Ratings. A look at the features of the tool. According to Morningstar, these ratings are based on a machine-learning based forward-looking statistical model with four parameters: Moat, Valuation, Uncertainty and Financial Health. A non-technical version of the rating method is also available.

Quantitative Valuation

This is a ratio of the fair value estimated with discounted cash flows (DCF) and its current market price.  The rating is expressed as Overvalued, Fairly Valued, and Undervalued. Those interested in exploring this method can use this tool Automated Stock Analyzer with Discounted Cash Flow Valuation. The main problem with any valuation method is analyst inputs. These are crucial to the result and is based on a qualitative perception of risk and reward in a particular industry. So it will be arbitrary. Morningstar’s approach is explained in Appendix B of this MorningStar Methodology Paper

Quantitative Economic Moat

A moat is a trench surrounding a castle to prevent attacks. Wider the moat, safer the castle. Warren Buffett used this term to identify the competition a particular company has in a sector. A moat is a measure of sustainable competitive advantage. According to Morningstar,

We assign one of three Morningstar® Economic Moat™ Ratings: none, narrow, or wide. There are two major requirements for firms to earn either a narrow or wide rating: 1. The prospect of earning above-average returns on capital; and 2. Some competitive edge that prevents these returns from quickly eroding.

The factors used to arrive at the Moat score are described in appendix C of the above-referenced document. MorningStar claims only 10% of all analysed stocks get a wide-moat rating.


Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

Quantitative Financial Health

This is a measure of financial distress or how well a company will meet its financial obligations and is expressed as Weak, Moderate, and Strong.

Quantitative Uncertainty

This takes into account future possible outcomes of the companies share price. It is possible for it to fluctuate wildly due to its proposed activities and how they will be received? Or will it be stable as it is a well-established player?  The rating is expressed as Low, Medium, High, Very High, and Extreme. A low rating implies a more stable return (possibly low) and higher rating implies higher risk-reward and requires a greater margin of safety in valuation.

This short video summarises how the above parameters are used to rate a stock by MorningStar

Sample Results (as on 14th Nov 2019)

  1. Head over to the Quantitative Rating Page
  2. Select the moat, valuation, uncertainty and financial health filters to shortlist stocks.

This is a screenshot.

Screenshot of the MorningStar India Quantitative Ratings Stock Screener

  • As many as 2433 stocks are undervalued as on 14th Nov 2019 with no other filters set.
    • Out of these, only 487 have strong financial health
    • No stock has low uncertainty (that is a possibility of stable return)
    • Wipro is the only undervalued stock with strong financial health, medium uncertainty but with a narrow moat
    • 22 stocks have high uncertainty, strong financial health and undervalued
  • ITC is the only undervalued stock with a wide moat; strong financial health; but strong uncertainty
  • Only 31 stocks have a wide moat with no other filters
  • Out of these, only Bajaj Finance Ltd and HDFC Bank Ltd  (!) and HDFC Bank Ltd are fairly priced
  • Only Alkem Laboratories Ltd has a low uncertainty rating with strong financial health and narrow moat but is overvalued.

After an initial shortlist, deeper analysis with the earnings power box tool and further checks as mentioned in this Wikipedia article is recommended.

Additional Resources

 

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.

  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter with the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

Explore the site! Search among our 2000+ articles for information and insight!

About The Author

Pattabiraman editor freefincalDr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision-making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & it's content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)