Morningstar's 5-Star Stock Picks 2015

posted Mar 6, 2016, 3:23 PM by Intelligent Investor   [ updated Mar 10, 2016, 1:54 PM ]
View My Financial Analysis: Morningstar 2015

I analyzed Morningstar's 5-star stock pick last year and I have come to the conclusion that many of Morningstar's 5-star stock picks aren't any good. Most of them are highly risky stocks. For the year 2015 I analyzed some of these stock picks using Warren Buffett's methodology (Buffettology). And the results are most of these stock picks just came out really bad. There are a few good investment ideas, but they are just good, not excellent.

Whiting Petroleum (WLL) has an erratic 10 Year Earnings History and so does Southwestern Energy (SWN). Goodrich Petroleum (GDP) hasn't had any earnings for several years. California Resources (CRC) doesn't even have a 10 Year Earnings History, they've only been traded publicly for 3 years.

According to Warren Buffett a company's 10 Year Earnings History is a very important aspect to look at. If the company's 10 Year Earnings History is erratic, what will the earnings for the next 10 years look like? 10 years into the future, there is a high probability that their earnings will be erratic too.

Think about this analogy, let's say you were in High School and you had a friend that got bad grades throughout his whole life. What are the chances that he will change and become a "straight A" student for his senior year, go to college, get a PhD and win the Nobel Peace Prize? Probably never. You are what you are. Your past will dictate what your future will be.

Companies are also like high school students. Some companies are just not good at what they do. Their 10 Year Earnings History will dictate what the future earnings will be. If the company loses money every time there is a recession, what will happen to the price of their stock? What will happen to the company itself? Will they still be in business? Or will they go bankrupt.

When analyzing a stock, the first thing we look at is the company's 10 Year Earnings History. Think of it as their work record or their high school transcript. As Intelligent Investors, we are only interested in companies with a solid work record, or a high school transcript that says this student is a "straight A" student, they will do well 10 years into the future. If the company's 10 Year Earnings history is erratic or just show losses year after year, look no further and put your money elsewhere.

As an example, look at Southwestern Energy's (SWN) 10 Year Earnings history. They have had a couple of years of earnings losses. When the Earnings History looks like that, we just avoid this stock altogether.

Southwestern Energy 10 Year Earnings History.

We are only interested in companies that make money year after year. Even if there was a recession and their earnings take a small dip, it's okay. What we don't want is a company that had an earnings loss even if it was just for 1 year.

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