Morningstar Advisor - June/July 2012 - (Page 66)

Screens Stocks on Sale in a Strong Market By David Krempa Use this screen to find bargains trading below their intrinsic value. The U.S. market started the year with a tremendous rally in the first quarter as investors became increasingly optimistic about the economy. This was on top of an already strong fourth quarter of 2011. The S&P 500 was up more than 15% from the start of the fourth quarter of 2011 until the end of the first quarter of 2012, making it much harder for Morningstar’s equity analysts to find undervalued stocks. As a whole, analysts believe the market is about fairly valued, but we should be able to find individual stocks that are trading at a discount to their intrinsic value. We saw the stock market get off to a similarly strong start in 2011 as the economy appeared to be on a strong recovery. But the market sold off later in the year on European fears and a stalled U.S. economy. To protect ourselves from getting too optimistic, we are going to search for value-oriented stocks, rather than chase growth stocks that investors have become increasingly interested in because of hopes of an rapid economic recovery. We ran this screen in Morningstar Principia. PE Ratio Current , 12 Despite looking for value stocks, we still want to find businesses that have good growth prospects. Many of the low-multiple stocks that passed our previous screen may trade at a depressed multiple for a good reason— because revenue is declining or growth prospects are weak—so this test should help eliminate declining businesses. First, we limited our search to stocks that trade at a low price/earnings ratio. We used 12 times earnings as our cut off. Although this will remove many high-growth stocks from our screen, we do not want to pay too rich of a valuation for a stock, especially if market sentiment about the economy shifts to a more pessimistic view, as it did last year. And Stock Stewardship Rating  Exemplary And Revenue Growth % 3 Year  5% On May 1, Morningstar rolled out a new methodology for rating the stewardship of companies (see “Stewardhip Goes Back to the Fundamentals,” Page 44). Morningstar’s analysts will soon rate the stewardship of all companies in our coverage universe. The rating takes into account how well a company protects shareholder capital. Analysts assess 66 Morningstar Advisor June/July 2012

Table of Contents for the Digital Edition of Morningstar Advisor - June/July 2012

Morningstar Advisor - June/July 2012
Contributors
Letter From the Editor
Be Worth Remarking About
How Important Is Stewardship?
From West Point to Points East
Where a Fund’s Secrets Lie
Getting Fund Directors on Board
Managers Prep for Housing Rebound
Four Picks for the Present
Investment Briefs
A Hedge Against Career Risk
Natural Gas Reaches Capitulation
Family Matters
How Good Stewardship Predicts Superior Performance
Stewardship Goes Back to the Fundamentals
On the Go for Fixed Income
Where Shareholders Ride First Class
Dangers Lurk in Exchange-Traded Notes
Stocks on Sale in a Strong Market
A Good Steward Is Easy to Find
Our Favorite Mutual Funds
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
Buffett Rule’s Biggest Losers

Morningstar Advisor - June/July 2012