5 star stocks: Morningstar undervalued picks

A practical guide to “5 star stocks” — the Morningstar designation for stocks judged significantly undervalued versus analyst fair value. Learn methodology, interpretation, recent examples, tools, ...

2024-07-06 06:29:00

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5 Star Stocks

A concise definition: "5 star stocks" most commonly describes U.S.-listed equities that Morningstar analysts rate five stars — indicating the security is judged significantly undervalued relative to Morningstar’s fair-value estimate. This article explains what the label means, how Morningstar derives it, how investors typically use these signals, limitations to watch, and where to find and verify current five‑star lists.

As you read you will learn: how the fair‑value model, market price and uncertainty feed the star assignment; practical steps to validate a five‑star idea; and a simple weekly workflow that incorporates Morningstar’s lists into disciplined research. The content is beginner friendly, grounded in Morningstar’s published approach, and includes recent examples reported by Morningstar.

Note: this article is informational and not investment advice. For trading, consider platform features such as order types, risk controls, and Bitget Wallet for custody of digital assets where applicable.

Definition and scope

In practice, the phrase "5 star stocks" refers to equities that receive a five‑star designation in Morningstar’s stock-rating system. Morningstar’s star scale for stocks is a forward‑looking, analyst-driven measure that compares an analyst’s intrinsic fair‑value estimate to the market price, adjusted for uncertainty.

Morningstar primarily applies this five‑star label to U.S.-listed stocks it covers, although the term is sometimes used informally by other services or newsletters. When financial media or screeners advertise "5 star stocks," they most often rely on Morningstar’s public lists (for example, "Five Star Stocks" or "New 5‑Star Stocks") or Morningstar’s screener outputs. The scope therefore usually means listed companies covered by Morningstar analysts or included in Morningstar’s screening universe.

As of January 2026, according to Morningstar, some high‑profile names such as Alibaba Group (BABA) were cited as a new five‑star pick in their weekly coverage; as of December 2025, Morningstar listed Choice Hotels (CHH) among recent five‑star selections. These examples illustrate how Morningstar updates and publishes lists on a weekly cadence.

Morningstar Rating for Stocks — purpose and overview

Morningstar’s stock star rating is designed to provide a snapshot of whether a stock appears undervalued or overvalued relative to the firm’s intrinsic valuation, with an emphasis on long‑term fundamentals rather than short‑term price moves.

The rating is forward looking and analyst‑driven. Morningstar publishes weekly highlights including "Five Star Stocks" and "New 5‑Star Stocks," where analysts discuss recent rating changes, the drivers behind fair‑value revisions, and any new additions to the five‑star cohort.

Investors use these weekly lists as idea generators, not as mechanical buy signals. Morningstar’s cadence — frequent updates and commentary — helps users see when fair‑value revisions or market moves produce a new five‑star assignment.

Key components of the methodology

Morningstar’s star assignment for a stock relies on three core inputs:

The analyst fair‑value estimate: an intrinsic valuation derived from analyst forecasts of revenues, margins, cash flows, and the firm’s competitive position.
The stock’s current market price: the observable trading price that, combined with the fair value, indicates discount or premium.
The Uncertainty Rating: a qualitative assessment (e.g., low/medium/high/very high) that quantifies the range of plausible fair values and therefore affects the thresholds for star assignments.

These three inputs interact to produce a star rating from one to five, where five stars indicate the largest discount to intrinsic value and one star indicates the largest premium.

Fair value estimate

The fair‑value estimate is Morningstar’s central intrinsic valuation for a company, produced by analysts using standard valuation tools (commonly a discounted cash flow model, plus scenario analysis where relevant). Analysts model core fundamentals: revenue growth, profit margins, capital expenditures, return on invested capital, and long‑term terminal assumptions.

Morningstar’s published reports explain the drivers behind each fair‑value estimate: industry dynamics, competitive moat, management quality, and the company’s balance sheet strength. The fair value is explicitly labeled in analyst writeups and is the anchor for the star calculation.

Uncertainty Rating

The Uncertainty Rating captures how wide or narrow analysts view plausible outcomes for a company. Typical levels are low, medium, high, and very high. Higher uncertainty widens the band of prices considered fairly valued, so a given discount to fair value may be less meaningful for a company with a very high uncertainty rating than for a company with low uncertainty.

For example, a small biotech with uncertain clinical outcomes commonly carries a very high uncertainty rating, expanding the fair‑value band. A stable consumer‑goods company may have a low uncertainty rating and a tighter valuation band.

Price vs. fair value and star assignment

Morningstar assigns stars by comparing the market price to the fair‑value estimate while accounting for the Uncertainty Rating. Roughly speaking:

5 stars: price is materially below the lower bound of the fair‑value range (largest discount).
4 stars: price is below fair value but not as far as the 5‑star threshold.
3 stars: price is near the central fair‑value estimate (fairly valued).
2 stars: price is modestly above fair value.
1 star: price is materially above the upper bound (largest premium).

Numerically, the discount thresholds are wider when uncertainty is high; Morningstar’s methodology adjusts the numerical cutoffs by Uncertainty Rating so that the star label reflects both valuation gap and confidence in the estimate.

Interpretation of a 5‑star rating

A five‑star rating signals that Morningstar’s analysts judge the stock to be significantly undervalued relative to their fair‑value estimate and within the context of the assigned Uncertainty Rating.

Important caveats:

A five‑star rating is not a short‑term timing signal. It reflects a valuation gap, not guaranteed near‑term price appreciation.
The rating is Morningstar’s view. Other analysts or models can produce different fair values and therefore different conclusions.
The fair‑value estimate and the Uncertainty Rating can change with new information (earnings, management guidance, macro events), and star assignments change accordingly.

Typical investor uses

Investors use "5 star stocks" lists primarily for idea generation and screening. Common practical uses include:

Screening: Use five‑star filters to narrow a universe to candidates that appear undervalued on Morningstar’s framework.
Watchlists: Add five‑star names to a monitoring list while analysts or investors validate the drivers behind the valuation gap.
Research starting point: Read Morningstar analyst reports to understand why the fair value differs from market pricing, then perform independent validation (financials, management commentary, competitive landscape).

Many value investors treat five‑star lists as a starting set for deeper due diligence rather than automatic buys.

Examples and recent lists

Morningstar publishes weekly lists of five‑star stocks and highlights recent additions. These lists change as Morningstar updates fair values or as market prices move.

As of January 2026, according to Morningstar, Alibaba (BABA) was highlighted as a new five‑star pick after analyst fair‑value revisions and market moves reduced the market price relative to Morningstar’s estimate.
As of December 2025, according to Morningstar, Choice Hotels (CHH) appeared among recent five‑star names, reflecting Morningstar commentary on recovery dynamics in travel and a valuation discount on the company’s fundamentals.
Prior lists have included large, diversified companies that occasionally trade at discounts—examples reported in past weeks by Morningstar include Tencent, Nestlé, and Biogen (these illustrate the variety of sectors and geographies that can appear in five‑star coverage when valuation gaps emerge).

These examples demonstrate that five‑star lists can include both domestic U.S. names and ADRs or foreign firms listed in the U.S., depending on Morningstar coverage.

Tools and screeners

Where to find five‑star stock lists and tools:

Morningstar’s website: official articles titled "Five Star Stocks" and "New 5‑Star Stocks," plus the Morningstar stock screener.
Morningstar stock screener: filter for star rating to isolate five‑star names in the Morningstar universe.
Third‑party aggregators: some financial platforms surface Morningstar’s five‑star flags within their own screeners or lists. Users should verify that the five‑star flag originates from Morningstar coverage.
Educational explainers: Morningstar and financial media often publish short videos or articles that explain the star methodology and highlight recent picks.

When using third‑party aggregators, confirm the underlying data is current and sourced from Morningstar to avoid stale or misattributed ratings.

Empirical evidence and performance

Research and practitioner observations on the historical performance of Morningstar‑rated undervalued stocks emphasize several points:

Performance varies with horizon: Stocks identified as undervalued can take months or years to converge to fair value, depending on the drivers behind the discount.
Dependence on analyst accuracy: Realized returns depend on how accurate Morningstar’s fair‑value estimates prove to be and whether the conditions assumed in the model materialize.
Market regime sensitivity: Value strategies (including buying undervalued names) often perform differently across market cycles. For example, in growth‑led markets, value gaps may persist longer.

Academic and practitioner studies on valuation signals commonly find that structured valuation frameworks can produce excess returns versus naive benchmarks, but results depend heavily on implementation, transaction costs, and risk management.

Limitations and criticisms

When dealing with "5 star stocks," recognize key limitations:

Analyst assumptions: Fair values reflect forecasts and assumptions. If an analyst underestimates risk or overestimates growth, the five‑star signal may be misleading.
News and regime changes: Mergers, regulatory shifts, macro shocks, or industry disruption can rapidly change fair‑value inputs.
Uncertainty rating impact: High uncertainty widens valuation bands, making star assignments less decisive for timing or conviction.
Coverage and survivorship bias: Morningstar covers many but not all companies. Lists may exclude smaller or less covered firms, and historical analyses of five‑star performance can be biased by the coverage universe.
Not a timing tool: A five‑star rating signals discount, not the time it will take to realize value.

Given these limits, treat five‑star labels as one input among many in an investor’s decision process.

Comparison with other rating systems

How Morningstar’s star ratings differ from other signals:

Sell‑side analyst ratings (buy/hold/sell): Sell‑side ratings are often short‑to‑medium‑term recommendations and reflect consensus target prices based on earnings expectations and market positioning. Morningstar’s star rating emphasizes intrinsic value and is more explicitly forward‑looking with a valuation orientation.
Fund star ratings (e.g., mutual fund star systems): These typically measure past performance against peers and risk‑adjusted returns, not intrinsic value. Morningstar’s stock stars are valuation signals for equities, not fund performance metrics.
Quant screens: Quantitative screens may use price multiples (P/E, EV/EBITDA), momentum, or factor exposures. Morningstar’s approach centers on an analyst intrinsic valuation rather than a simple multiple or factor score. Each method has different strengths: quant screens are scalable and rules‑based, Morningstar’s ratings offer analyst insight into business fundamentals.

In short, Morningstar’s five‑star designation is conceptually an intrinsic‑value signal, distinct from consensus sell‑side price targets or performance‑based fund ratings.

Practical guidance and due diligence

A recommended workflow when you encounter a five‑star stock:

Read Morningstar’s analyst report. Note the fair‑value drivers and any scenarios the analyst highlights.
Check the Uncertainty Rating and understand why Morningstar assigns that level.
Review company fundamentals: revenue trends, margin profile, free cash flow, balance sheet strength, and recent earnings calls.
Cross‑check alternative valuations: dividend discount models (where applicable), comparable company multiples, and sell‑side research if available.
Evaluate news and risks: regulatory matters, litigation, or sector headwinds that could alter fair‑value assumptions.
Consider position sizing and risk management: five‑star status reduces price‑relative risk per Morningstar’s view but does not eliminate company‑specific or market risk.
Monitor changes: set alerts for material fair‑value revisions from Morningstar or significant price moves.

This disciplined validation helps ensure the five‑star flag is an actionable input rather than a headline trigger.

Related concepts

Short explanations of related terms:

Fair value: The analyst’s estimate of intrinsic value based on fundamentals and discounted cash flows.
Economic moat: The sustainable competitive advantage that allows a firm to earn returns above its cost of capital over time.
Uncertainty Rating: Morningstar’s measure of how wide the plausible range of outcomes is for a company.
Undervalued/overvalued: Relative terms comparing market price to intrinsic value; undervalued means market price is below intrinsic estimate.
Star ratings for funds: Morningstar’s separate system for mutual funds/ETFs that primarily reflects past performance relative to peers.
Analyst coverage: The set of companies a research house or platform follows; coverage affects the availability of fair‑value estimates.

References and sources

Primary sources used to compile this article include Morningstar’s public pages: "Five Star Stocks," "New 5‑Star Stocks," and Morningstar methodology pages describing the stock fair‑value process and uncertainty ratings. Third‑party screeners (e.g., finance sites that resurface Morningstar flags) and Morningstar videos were also referenced for general explanatory context.

As of January 2026, according to Morningstar, Alibaba (BABA) was cited as a new five‑star pick in the firm’s weekly summary.
As of December 2025, according to Morningstar, Choice Hotels (CHH) appeared on the new five‑star list published that week.

Note: specific market data (market cap, daily volume) and institution‑level metrics should be verified in real time using official sources such as company filings, exchange data, or Morningstar’s current reports. This article intentionally summarizes methodology and illustrative examples rather than presenting time‑sensitive price or volume figures.

Limitations of this article and disclaimers

This article is educational and descriptive of Morningstar’s rating framework. It does not provide personalized investment advice or specific buy/sell recommendations. All readers should perform independent due diligence and confirm up‑to‑date facts before acting.

Appendix: Example weekly workflow

A concise workflow investors can adopt to incorporate new five‑star lists into research:

Step 1 — Weekly screen: Review Morningstar’s "New 5‑Star Stocks" article each week and flag names that match your sector or risk profile.
Step 2 — Morningstar read: Open the full Morningstar analyst report for each flagged name and extract the fair‑value drivers and uncertainty rating.
Step 3 — Quick fundamental check: Verify recent revenue trends, margins, and balance‑sheet metrics from company filings or official reports.
Step 4 — Alternative valuation: Compute a simple comparable multiple and a sensitivity DCF to see if independent methods align with Morningstar.
Step 5 — Risk check and sizing: Identify key risks, set position size limits, and determine entry plan (e.g., staggered buys or limit orders).
Step 6 — Monitor and update: Revisit Morningstar reports and price movements monthly or when material news arrives.

This routine keeps five‑star research systematic and repeatable.

Next steps and where Bitget fits

If you explore broader equity and digital‑asset research workflows, consider integrating tools that support disciplined execution and custody. For users also interested in digital assets and wallets, Bitget Wallet provides multi‑asset custody and interface options. For trading and order execution, consider a platform that supports limit orders, risk controls, and transparent fee schedules.

To explore more educational resources and tools for structured research, search Morningstar’s methodology pages and the weekly "Five Star Stocks" updates. For execution and custody needs related to digital asset exposure, learn about Bitget and Bitget Wallet features.

Further exploration: keep a personal watchlist, verify current Morningstar fair‑value estimates, and apply the weekly workflow above to turn five‑star ideas into disciplined research projects.

This article referenced Morningstar’s weekly lists and methodology. For the latest five‑star lists and analyst reports, consult Morningstar’s official publications and the Morningstar stock screener.

The content above has been sourced from the internet and generated using AI. For high-quality content, please visit Bitget Academy.