Like many of my colleagues here at Morningstar, I'm an investment junkie. As a stock analyst, I follow dozens of companies, write about trends in the industries I cover, and talk to investors about how to analyze stocks. And in my spare time, I read Wall Street histories for fun.
For someone like me, the Quicktakes here on Morningstar.com are a feast of information and useful features, many of which aren't available anywhere else on the Web. Last week, Amy Granzin revealed her favorite goodies in the fund Quicktake. Today, I'm going to share my must-haves from the stock Quicktake, including the features I find most useful as an analyst. You'll find all these features and more in the menu bar on the left side of the Quicktake page.
1. Morningstar Stock Grades
If I'm looking for a quick overview of a stock, I check out its Morningstar stock grades. These tell you at a glance how a given stock stacks up against its peers in four key areas: growth, profitability, financial health, and valuation. (For more on our stock grades, click here.)
The ideal stock would have high grades in all four categories. There are a few stocks that fit this bill, such as Dell Computer DELL and Nokia NOK. But plenty of stocks that get low or mediocre grades in one or more categories are still potentially good investments, depending on what I'm looking for.
For example, Cisco CSCO gets grades of A or A-plus in growth, profitability, and financial health, because it's such a financially strong and well-run company. But that high quality has made Cisco expensive, and its valuation grade is a lackluster C. On the other hand, Eastman Kodak is cheap, with a valuation grade of A-plus, and it also receives high marks for profitability and financial health. But Kodak's growth has been slow, giving it a grade of C-minus.
If I'm looking for a stock with modest price risk, regardless of its growth potential, Kodak might be the better choice. If I want growth at any price, Cisco wins out.
2. Return on Equity and Free Cash Flow
Two of the most important measures that I look at in evaluating a stock are return on equity (found on the Stock Grades page) and free cash flow (found on the Financials page). We at Morningstar have always considered these among the best ways to measure how well a company is generating wealth, yet they're next to impossible to find on other stock sites.
Return on equity measures how much profit the company is generating for each dollar shareholders have put into the firm. Free cash flow tells you how much actual cash a company has generated in a given year after investing in its growth. (For more on the importance of these numbers, click here.)
The ideal stock has both high returns on equity and high free cash flow--Microsoft MSFT, despite its recent problems, is still a good example of this type. But stocks don't have to be "ideal" to be good investments. Home Depot HD, for example, generates low free cash flow because it's spending so much money to build new stores and expand. But Home Depot's high return on equity means that it's still generating an excellent return for its shareholders. Once Home Depot's spending slows, it will most likely start churning out good free cash flows.
Return on equity and free cash flow help me distinguish between money pits and cash machines. For stock investors who think of themselves as owners of a company--and we at Morningstar have always thought in those terms--these two numbers speak volumes.
3. Morningstar Business Appraisal
When it comes to telling whether a stock is expensive or cheap, I start with many of the same measures other analysts do: The company's price/earnings and other ratios versus those of its industry, its dividend yield and earnings yield versus those of the S&P 500, and so on. All these can be found in the stock Quicktakes, including historical numbers to give perspective.
But I also consider the Morningstar business appraisal, or our estimate of the stock's true worth based on its riskiness and projected future cash flows. The appraisal ratio, equal to the business appraisal divided by the actual stock price, gives you some idea whether a stock is expensive (with a ratio under 1.0) or cheap (with a ratio over 1.0). The higher the appraisal ratio, the cheaper the stock. I use the appraisal ratio in combination with other valuation measures to gain a better understanding of a stock's relative worth.
For example, at first glance, Intel INTC appears to be much more expensive than ExxonMobil XOM--it has a much higher P/E (51 vs. 22), price/book (11 vs. 4) and price/sales (14 vs. 1). But according to the appraisal ratio, Intel is a considerably better bargain, with a ratio of 1.2 compared to ExxonMobil's 0.7. Because Intel is expected to grow faster and be more profitable than ExxonMobil, its higher P/E is more than justified.
4. Fund Ownership
One of my favorite tests of a stock's worthiness as an investment is: Do any investors that I respect own it? The Major Fund Owners section of each stock's Quicktake lists the funds that own the biggest stakes in that stock--great information that isn't available elsewhere.
For example, take Eastman Kodak, which looks like a bargain according to its Morningstar stock grades. Stocks are usually cheap for good reasons, and in Kodak's case those reasons include slowing growth and a fear that it will be left behind in the transition to digital photography. But the Major Fund Owners list in its Quicktake reveals that one of Kodak's biggest shareholders is the Legg Mason Value Fund LMVTX, run by Domestic Equity Manager of the Year Bill Miller. Miller's track record in picking winners among beaten-down stocks is exceptional, so knowing that he owns Kodak makes the stock more attractive to me.
5. Industry Peers
Sometimes it can be hard to put a stock in the right context, especially if I'm researching a stock in an industry that's outside my specialty. That's when I head to the Industry Peers section of the Quicktake. It lists the biggest competitors in a company's industry, with their market caps and Morningstar grades, which allows me to get a feel for a firm's strengths and weaknesses versus its competitors.
Maybe I'm considering investing in Cisco, but I'm wondering how it stacks up against other big networking-equipment stocks. By checking out Cisco's industry peers, I discover that Cisco's profitability and financial health are better than those of most of its competitors. And Cisco's C grade in valuation doesn't look too bad compared to the Ds and Fs sported by many other stocks in the industry.
Beyond the Numbers
For investors (like me) who are really serious about digging into a company's numbers, even more advanced tools are available through the Quicktakes. I can get brokerage research through Multex, listen to a company's conference calls once a quarter, and read its filings with the Securities and Exchange Commission.
With a premium membership to Morningstar.com, true addicts can read analyses of hundreds of stocks. Each analysis includes positive "bull" points and negative "bear" points for each stock, along with a Bird's-Eye View and a longer analysis that explains in concise terms what's going on with the stock. Even without a premium membership, you can read a different analysis for free every day. Once you see how we as analysts evaluate stocks, you'll gain an even greater appreciation of all the wonderful resources available in the stock Quicktakes.