Why I Ignore Morningstar’s Review (What I Do Instead)

Star ratings are helpful—until they become a shortcut. Morningstar’s 1–5 stars are primarily about valuation, not business quality. Learn the smarter way to build conviction and why stock price (or past return) shouldn’t drive your decisions.

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You’ll Learn

What Morningstar’s Stars Really Measure

For stocks, Morningstar’s stars are driven by the gap between the current price and their fair value estimate (a 12-month target derived from a valuation model).
More undervalued vs. their model = more stars; more overvalued = fewer stars.
Pros: easy to read, numeric, consistent, helpful for spotting value setups.
Cons: still rests on assumptions (every model = a crystal ball), and it leans to value—which can promote weak businesses that simply got cheap.

Why Mike Doesn’t Trade on Stars (Morningstar or Anyone Else)

One number is not a thesis. No single metric—P/E, yield, stars—captures durability, strategy, or execution risk.
Valuation models vary by inputs (growth, margin, discount rate). Change an input, get a new “value.”
You can copy someone’s rating, but you can’t copy their conviction—and without conviction, you’ll panic on volatility.

The Dividend Stocks Rock (DSR) Lens: Quality First, Then Price

Dividend Triangle = 3 trends that matter: revenue, EPS, dividend. Rising lines suggest a healthy engine; falling lines show where to dig.
DSR Pro Rating (1–5): blend of quantitative trends + qualitative thesis.
Dividend Safety Score (1–5): forward view of dividend ability + culture (e.g., consistent increases = higher score; no raise in 18+ months drops to a 2).
These are business-health scores, not price calls.

Same Stock, Different Angle: Why Ratings Conflict

BCE: DSR repeatedly downgraded quality (triangle weakening) well before the dividend cut; Morningstar rated it 5-star on valuation—cheap vs. fair value.
Lesson: A stock can be “cheap” and low quality. Decide which lens you prioritize.

“Okay, But Does Price Matter?” (And Why DSR Ignores It in Ratings)

Past price action and short-term total return say more about sentiment than business health.
Exhibit A: Broadcom (2018)—down ~20% in weeks, looked awful… and then delivered a multi-bagger over the years.
Process over price: evaluate the engine, not last month’s speedometer.

Examples Across the Spectrum

“Meh” bucket (DSR 3/3):
- Altria (MO): cash cow but secular headwinds; Morningstar: ~3 stars—broad agreement it’s fine, not thrilling.
- Campbell Soup (CPB): weak triangle—DSR 3 Pro / 2 Safety, yet Morningstar 5 stars on valuation after a price drop. Value signal vs. quality signal.
Solid quality (DSR 4s):
- AbbVie (ABBV): pipeline + Botox/Aesthetics diversification—DSR 4/4; Morningstar ~3 (fairly valued).
- TELUS (T.TO, TU): improving cash flow; diversified (Agriculture, Health, TI). DSR 4 and still Morningstar 5 on valuation—different reasons, same “interesting” tag.
Cream of the crop (DSR 5s):
- Dollarama, Microsoft, Visa: pristine triangles. Morningstar often calls these overvalued (e.g., DOL: 1–2 stars; V: ~2), which is coherent for a value lens but doesn’t negate quality.

How to Use Ratings the Right Way

Pick one framework to reduce noise. Mixing star systems = guaranteed analysis paralysis.
Use ratings as a filter to narrow your list—then do real work: business model, moat, growth vectors, capital allocation, and risks.
If a service rates your holding poorly, ask why. If you disagree and can articulate why, you’ve earned conviction. If you can’t, revisit the thesis.

Build Your Own Mini-Rating (Mike’s Suggestion)

Start with the Dividend Triangle (5-yr trend if possible).
Add 3–5 must-know metrics for the sector (e.g., FCF, leverage, payout, same-store sales, net retention).
Score each 1–5 and weight what matters to you (income vs. growth).
Outcome: a personal, repeatable rubric that outperforms any one-size-fits-all star.

Final Word: Quality at Full Price Beats Junk on Sale

Mike would rather buy a healthy compounding machine at “full” price than a weak business that looks cheap.
Ratings can point you to ideas, but trends + thesis are what keep you invested when volatility tests your resolve.

Free Webinar: Avoid Price Confusion and Act with Conviction

When a stock dives or spikes, most investors react to the price. In this session, we’ll show you how to ignore the noise and interrogate the business—so you can decide, confidently, whether to sell, hold, or buy more.