The Morningstar Uncertainty Rating received a updated methodology earlier this week. The intuition behind the rating is simple: different companies have different levels of fundamental risk. Some companies have stable and predictable cash flows; others may not be as stable or predictable. This is where the Morningstar Uncertainty Rating comes in.
As Morningstar equity analyst Eric Compton explains, “As an investor, if you are very uncertain about a company’s future and therefore very uncertain about its intrinsic value (see Morningstar Fair Value Estimate), you should want a higher headroom, and vice versa.
The Morningstar Uncertainty Rating in Practice
The uncertainty rating represents our analysts’ ability to tie the estimated value of a company’s stock around Morningstar’s fair value estimate. The uncertainty index has five categories: low, medium, high, very high and extreme. Factors that can influence a company’s rating include operating and financial leverage, sensitivity of sales to the global economy, product concentration, pricing power, exposure to environmental, social and important governance and other company-specific factors.
Down. The margin of safety for a 5 star rating is a 20% discount and for a 1 star rating a 25% premium.
Medium. The margin of safety for a 5 star rating is a 30% discount and for a 1 star rating a 35% premium.
High. The margin of safety for a 5 star rating is a 40% discount and for a 1 star rating a 55% premium.
Very high. The margin of safety for a 5 star rating is a 50% discount and for a 1 star rating a 75% premium.
Extreme. The margin of safety for a 5-star rating is a 75% discount and for a 1-star rating a 300% bonus.
How many stocks were affected?
“Our analysts use their in-depth knowledge of the companies they cover to assign them all an uncertainty rating. This uncertainty rating ensures that our star ratings (1-5) are risk-adjusted, implementing an appropriate margin of safety. This is yet another way we aim to help investors make more informed decisions about their equity investments,” Compton says.
Compton and his team have scoured our entire stock coverage universe. “About a quarter (24%, to be exact) of the applicable coverage universe experienced a change in uncertainty rating when we launched our new uncertainty rating process. Of the 357 companies that saw their uncertainty score change, around three-quarters (72%) saw a decrease in the level of their uncertainty score, i.e. a narrowing of the safety margin required for a given score. About a quarter (28%) saw an increase in the level of their uncertainty rating or a widening of the margin of safety. The most common rating change was from High to Medium; a change from very high to high was the second most common update,” he said.
In our coverage universe, there are 67 Canadian stocks, 23 of which have received a revised Morningstar Uncertainty Rating. 22 received a lower Morningstar uncertainty rating. One – Spin Master (TOY) received a higher rating from Medium to High. Here is the list :
Morningstar Analyst Jamie Katz assigns a high Morningstar Uncertainty Rating to Spin Master based on the company’s fundamental exposure to the economy and economic cycles, and the range of performance results used by our rating system. star rating. She remains concerned that a new toymaker may come on board and take shares of Spin Master.
“We believe that Spin Master faces certain risks that could affect its business value. For starters, customer concentration increases the risk that liquidity issues or changes in ordering patterns will affect spin-off profits In this vein, the top three retail customers accounted for approximately 51% of gross product sales in 2021, and physical retail has become more competitive. Second, the business is exposed to the risk of litigation over recalls of products or poor manufacturing of its products given the outsourced nature of its manufacturing Third, integration risk from acquisitions could disrupt management direction and hurt earnings, a factor that is not expected to mitigate as the management team plans to leverage its global platform through continued strategic combinations,” di she.
