How to Use Morningstar’s Ratings In Your Portfolio

On the Oct. 27, 2026, episode of The Morning Filter podcast, guest host Sarah Hansen and Morningstar Chief US Market Strategist Dave Sekera discuss how investors can use Morningstar’s ratings for stocks in their own portfolios. Here is an excerpt from the show.

What to Do When a Stock’s Star Rating Changes

Sarah Hansen: Let’s switch gears to the question of the week. If you have a question for us, as a reminder, you can send us an email at themorningfilter@morningstar.com. Today, we have a viewer who wants to know how they can follow Dave’s star ratings, excuse me, for stocks. I think this is just a great thing to talk about because it’s a really rigorous process on our end. All our analysts put a ton of thought and work into it. Dave, maybe you can walk us through it a little bit. Tell us about the star ratings, how viewers can see them, where they can see them, and how they might incorporate changes in those ratings into an investment strategy.

David Sekera: Sure. So, just as a reminder for people that might not be familiar, what is a

? It’s a rank order, 1 to 5; 1-star stocks being those that we think are the most significantly overvalued, 5-star-rated stocks being those that we think are the most undervalued as compared with our long-term intrinsic valuation. The rating, in and of itself, is really a risk-adjusted way to identify which of those stocks we think are trading far enough away from that intrinsic valuation based on the Uncertainty of the underlying cash flows of the company to either be able to start selling that stock if it moves into 2-star and 1-star territory and conversely, start buying into that stock if it moves into 4-star and 5-star territory.

It’s really that

which really changes the band around the intrinsic valuation. For example, if something’s a Very High Uncertainty, you want a big margin of safety beneath the intrinsic valuation before you start to buy that stock. But conversely, you also want to let a stock like that run a lot longer and a lot higher over intrinsic valuation before you’d start looking to sell it. Now, unfortunately, I mean, we talk about a lot of different stocks on the podcast, so I can’t really always highlight every single week what those star ratings changes may be on any of those stocks that we’ve talked about in the past. I mean, the market moves very quickly. We also make adjustments to our fair values over time. I think that’s a good reason, whether it’s your individual stock holdings or just those that you’re watching, for setting up a portfolio of those stocks on Morningstar, whether it’s morningstar.com, whichever other Morningstar platform you use. That way you can see when those ratings are changing up or down in any one individual case.

The way that I like to think about using these ratings is really just to be able to position your portfolio into those stocks that we think have the best risk-adjusted long-term return potential based on the intrinsic valuation. Again, they’re not necessarily for trying to trade around. They’re not a great signal for trying to short stocks. But the way I think about it is if it’s a 4-star-rated stock, that’s a good indicator that it’s probably trading at enough margin of safety below that intrinsic valuation, maybe to start a partial position, whether it’s a third or a half-size position. And then that way you have the dry powder. That way, if it moves down, goes into 5-star territory, that’s a good indication of dollar-cost averaging in and being able to buy more stocks.

That way, your average purchase price goes lower and lower. And then when it recovers, goes back up to 3 stars, gets back to fair value, that might be a good point to take some profit off the table. If it keeps moving up from there, goes into 2-star territory, that’s a good indication that it’s probably time to sell some more, lock in a little bit more profit to the upside. Once it gets into that 1-star territory, that’s probably the indication that maybe if it’s really running, you got a lot of momentum, maybe you let it run, but that’s when you want to use probably more technical analysis that if that momentum starts coming to an end, that’s when you want to go ahead and exit altogether.

How to Track the Performance of Stock Picks

Hansen: Great. Thanks, Dave. Be sure to check everything out on whatever Morningstar platform you use. There’s a ton of resources. And while we’re on this topic, I know the podcast gets a ton of questions from viewers about how they can measure and track the performance of your picks, Dave. Let’s talk about it. Is there any kind of Dave report card index out there so we can see how you’re doing?

Sekera: Yeah. It’s a really hard question to answer, and I don’t mean this as a cop out, but there really is no good way to measure individually all of the stocks that we highlight on The Morning Filter, both the buys, the sells, and sometimes when we bring different swap ideas. Ideally, if you were going to try and do that, you’d need to build an index of all of those individual recommendations. Personally, I do keep a file of all of my prior recommendations, and I do go back to that to see where we’ve been right, where we’ve been wrong, and be able to use that as a learning tool. But ideally, you would want to build an index of all of the individual recommendations, and you’d have to be able to start with some sort of position sizes, but then have the index change those position sizes as a stock trades around.

For example, you’d want to necessarily increase the position size within the index if the stock trades down as you move from 4 stars to 5 stars and as you dollar-cost average to the downside. And then conversely, that index would also then have to take profits to the upside and exit that position altogether. This isn’t something that we can actually do on a week-to-week basis when we talk about the stocks that we highlight on The Morning Filter, which is why you really need to set up your own portfolio on Morningstar.com or whichever platform you use. Of course, it’s not just the changes in the stock price, but also changes in our fair value. I mean, there will be instances where maybe it’s a 4-star-rated stock. We talked about it, recommended it on the podcast, but maybe the stock has fallen, maybe we’ve cut our fair value, maybe we cut our fair value enough that it was a 4-star stock, but we cut it so much that it’s a 3-star- or a 2-star-rated stock after that fair value cut because our intrinsic valuation analysis was wrong or there was some catalyst that changed the story there. In that case, that also would need to get incorporated into that index view as well.

I guess what the good news is here is I know we’ve had our quant team doing a lot of work on our star rating system overall and looking at our intrinsic valuations. I think we are getting pretty close to finishing up an efficacy study, which will get published hopefully here in the short term. Now, that’s not just the stock picks that are brought to the podcast, but it will be an efficacy study of all of our star ratings. Once that efficacy study is released and it’ll be published publicly, at that point, we’ll conduct a special podcast to review that. But I think people will be relatively pleased with what the efficacy is over the long term.

Subscribe to The Morning Filter on Apple Podcasts, or wherever you get your podcasts, and keep up with the latest research from hosts Susan Dziubinski and David Sekera, and guest host Sarah Hansen on Morningstar.com.

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