MORNINGSTAR WANTS TO RATE STOCKS, TOO: SERVICE IS ITCHING TO REPEAT SUCCESS OF ITS FUND SCREEN

Mutual fund rating giant Morningstar Inc. is investigating the idea of extending its famed star ratings to individual stocks.

“We are doing more work on stocks and looking at more ways to narrow down the field,” confirms Morningstar President and CEO Don Phillips. “One of the things that could evolve out of that over time is a star rating or a series of preset (stockpicking) screens.”

Mr. Phillips says Morningstar has no timetable for introducing a star-rating system for stocks. “Our analysts are working through these things,” he explains, noting that there is internal trepidation over endorsing a single rating system. “You realize that no one investment system is always right.”

But adding a consumer friendly stock-ranking component to the Chicago company’s offerings would boost its competitive position against New York-based Value Line Publishing Inc., long considered the leader in rating stocks for individual investors.

Morningstar’s attempts to identify and recommend attractive stocks so far have consisted of a series of articles published on-line and newsletters bundled with monthly CD-ROM updates of its 11-month-old StockTools, software that covers nearly 8,000 U.S.-based stocks. The articles — aimed mainly at encouraging investors to become more comfortable with ways to screen stocks — have examined financial criteria used by legendary value investor Benjamin Graham, academic experts and portfolio stars like David Schafer of the Strong Schafer Value Fund.

But it’s clear Morningstar executives are itching to come up with a stock-selection system that parallels the success of their widely popular mutual

fund rating system that uses a one-through-five-star formula based on fund expenses, risk and past performance.

The easy-to-understand ratings helped turned Morningstar into a 1990s success story, with estimated 1997 revenues of $40 million. More important, mutual funds carrying its top four- and five-star ratings now drive much of the industr
y’s sales.

Just last month, Paul Pudaite, Morningstar’s director of quantitative research, contacted Cornell University Professor Charles Lee seeking to replicate Mr. Lee’s value-to-price ratio — an accounting-based model that incorporates changes in earnings forecasts and book values to predict whether individual stocks will beat or lag the overall market.

Mr. Pudaite, who holds a doctorate in math from the University of Illinois, joined Morningstar nine months ago. “He offered a possible refinement to the cost-of-capital measure,” says Professor Lee. “I don’t know what commercial aspirations they have for it.”

If Morningstar does roll out a stock-rating system, it will compete even more directly with the weekly Value Line Investment Survey, which ranks the most attractive buys of 1,700 of the market’s largest and most liquid stocks, based on a rating of price and earnings momentum.

The Value Line survey reaches 100,000 subscribers and generates some $57 million in revenues. (A Value Line software product, Investment Survey for Windows, competes with Morningstar’s StockTools.)

“We’re not concerned,” says Value Line’s research chairman, Samuel Eisenstadt. “If they come up with anything good, we’ll be glad to look at it.”