Morningstar.com's Contrarian Approach to Equity Research

If you have spent any amount of time reading equity research reports from the various brokerage houses (including those that are supplied by your online broker - ICICI Direct, HDFC Sec, etc), you would have come across their stock target prices, and their buy/ sell calls based on those target prices.

Invariably these target prices are calculated based on some variation of Discounted Cash flow, or relative valuation methodologies like P/E, P/B etc. In a shift from the 'target price' model of equity research, Morningstar.com (U.S. site), has inverted this methodology and instead publishes its estimate of intrinsic value and provides its views on stocks based on how much lower or higher than intrinsic value the stocks are trading. The website refrains from publishing target prices.

For value investors, I believe that this is a very sensible approach. Given that the markets are highly unpredictable, it is quite clear that the 'Target Price' based approach might be more suitable for Growth investors as well as investors with shorter time horizons. Typically equity research reports have target horizons of 1 year.

The Morningstar approach works by providing an appraisal of the Intrinsic Value. Investors can then choose to enter or avoid the stock depending on their preference for margin of safety. i.e. Those who would like to invest in deep value situations, might prefer to invest in stocks which are trading at 50% discount to intrinsic value, and so on.

In India, we know Morningstar as a provider of research on Mutual Funds. In the US, the company has progressed and is now actively involved in equity research. I believe that as and when they bring their Intrinsic Value approach to India, it would be a valuable tool for Indian investors.