Saturday, January 12, 2008

Would Morningstar like this portfolio?

Recently, I profiled a portfolio that looks like it could do well to help fund a financially secure retirement, based on borrowing against your home, and using dividends to make the payment.

Today I joined Morningstar, and looked up the rankings for all of those stocks. Some of their key rankings involve their assessment of overall business risk, the moat of the company, the overall rating (out of five stars), and their estimate of fair value. Now, due to their business model, I consider Morningstar ratings to be of higher quality than that churned out by the average investment house.

Of the eight stocks in the portfolio, only three of them have an overall "three star" (average) rating (Progress, Reynolds and Verizon), with GE having a four, and the rest at five stars. This suggests an above-average portfolio, overall.

The average ratio of current stock price to their indicated fair value is just 80%, with only Verizon over 100% (109%), and all the rest are at 92% or below. This suggests that, as a group, there is room for significant capital growth going forward. The best buy of the group on this ranking is Bank of America, which they estimate is trading at just 55% of their fair value estimate.

All of the businesses exhibit "average" business risk, except for Reynolds (above average) and US Bancorp (below average).

Five of the businesses are defined as having a "wide" moat, while the same three stocks that got an overall three star (average) rating had their moat defined as "narrow". According to information Morningstar publishes, only about 10% of their coverage universe achieves a "wide moat" definition, with about 45% achieving the next highest "narrow moat" ranking, and the balance defined as "no moat". This suggests that this portfolio is far more secure than average in this criteria.

In summary, I'd say that the portfolio is above-average quality in three of these four important categories, while still no lower than average in any category (average in overall business risk).

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