Morningstar Advisor - August/September 2011 - 68

Screens
Cheap, Local, and On a Roll
By Timothy Strauts
Use this screen to find undervalued U.S. ETFs with momentum.
The U.S. stock market has been on a great run
over the past two years. Since the March 2009
low, the S&P 500 is up just more than 100%.
If your clients have been fully invested these
past two years, they should be pretty happy,
but there are many investors who still have
cash on the sidelines. For those investors
looking to put money to work, where should
they invest today?
Security Type
5 ETF
And Morningstar Category 5 Domestic Stock
For this screen, we will focus on the domesticstock
exchange-traded fund universe.
And Holding Avg Star Rating . 3.30
To find areas of the market that are still
undervalued, we will lean on Morningstar's
equity analysts for guidance. The average
star rating for an ETF's holding is an assetweighted
average of the Morningstar Rating for
stocks in the portfolio. This average star
rating offers the insight into the valuation of
the equity holdings in a portfolio and draws
on the research of Morningstar's stable
of in-house equity analysts. Many people are
familiar with the ETF and mutual fund star
rating methodology, which ranks funds based
on risk-adjusted returns for three-, five-, and
10-year time periods. So an ETF's star rating is
a backward-looking measure. A stock's star
rating, however, is forward-looking.
The Morningstar Rating for stocks has nothing
to do with the stock's historical performance
and is calculated by comparing a stock's current
68 Morningstar Advisor August/September 2011
market price with Morningstar's estimate of
the stock's fair value. The rating system also
includes a risk adjustment, so it's more difficult
for a company with above-average business
risk to earn a 5-star rating. The margin of
safety our analysts demand before giving a
stock 5 stars is determined by their assessment
of business risk. Our analysts assign stocks to
one of three business-risk ratings.
Each of the five star-rating levels is defined
based on expected returns, which assume that
the stock's market price and our fair value
estimate for the stock eventually converge.
Under the system, 3-star stocks are those that
should offer a " fair return, " one that compensates
for the risk of the stock, or a rate of
return that's comparable to the stock's cost of
equity. (The cost of equity is often called a
" required return " because it represents the

Morningstar Advisor - August/September 2011

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2011

Morningstar Advisor - August/September 2011
Contents
Contributors
Letter From the Editor
Simplicity and Design Matter
Do You Use ETFs Strategically or Tactically?
The Institutional Way
How to Analyze an ETF
Eyeing ETFs’ Next Chapter
Small-Cap/Large-Cap Flip-Flop?
Four Picks for the Present
Investment Briefs
Morningstar Investment Conference
Pitfalls of Peer Groups
A REIT Recovery, With a Catch
Turning Fund Distribution on Its Head
Here Come ETF Managed Portfolios
Circle These Picks Amid the Crop of New ETFs
ETF Analyst Favorites
Beware, the Accidental Portfolio Manager
It’s the Destination, Not the Vehicle
New Growth, Rooted in Experience
Better Ways to Look at ETFs
How to Better Manage Your Clients’ Future(s)
More Bargain Than Bubble
Cheap, Local, and On a Roll
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
First-Quarter Assets Hit an All-Time High
You Say You Want a Revolution?
Morningstar Advisor - August/September 2011 - Intro
Morningstar Advisor - August/September 2011 - Morningstar Advisor - August/September 2011
Morningstar Advisor - August/September 2011 - Cover2
Morningstar Advisor - August/September 2011 - 1
Morningstar Advisor - August/September 2011 - 2
Morningstar Advisor - August/September 2011 - Contents
Morningstar Advisor - August/September 2011 - 4
Morningstar Advisor - August/September 2011 - 5
Morningstar Advisor - August/September 2011 - Contributors
Morningstar Advisor - August/September 2011 - Letter From the Editor
Morningstar Advisor - August/September 2011 - Simplicity and Design Matter
Morningstar Advisor - August/September 2011 - 9
Morningstar Advisor - August/September 2011 - Do You Use ETFs Strategically or Tactically?
Morningstar Advisor - August/September 2011 - 11
Morningstar Advisor - August/September 2011 - The Institutional Way
Morningstar Advisor - August/September 2011 - 13
Morningstar Advisor - August/September 2011 - How to Analyze an ETF
Morningstar Advisor - August/September 2011 - 15
Morningstar Advisor - August/September 2011 - Eyeing ETFs’ Next Chapter
Morningstar Advisor - August/September 2011 - 17
Morningstar Advisor - August/September 2011 - Small-Cap/Large-Cap Flip-Flop?
Morningstar Advisor - August/September 2011 - 19
Morningstar Advisor - August/September 2011 - Four Picks for the Present
Morningstar Advisor - August/September 2011 - 21
Morningstar Advisor - August/September 2011 - Investment Briefs
Morningstar Advisor - August/September 2011 - 23
Morningstar Advisor - August/September 2011 - 24
Morningstar Advisor - August/September 2011 - 25
Morningstar Advisor - August/September 2011 - Morningstar Investment Conference
Morningstar Advisor - August/September 2011 - 27
Morningstar Advisor - August/September 2011 - Pitfalls of Peer Groups
Morningstar Advisor - August/September 2011 - 29
Morningstar Advisor - August/September 2011 - 30
Morningstar Advisor - August/September 2011 - 31
Morningstar Advisor - August/September 2011 - A REIT Recovery, With a Catch
Morningstar Advisor - August/September 2011 - 33
Morningstar Advisor - August/September 2011 - 34
Morningstar Advisor - August/September 2011 - 35
Morningstar Advisor - August/September 2011 - 36
Morningstar Advisor - August/September 2011 - 37
Morningstar Advisor - August/September 2011 - Turning Fund Distribution on Its Head
Morningstar Advisor - August/September 2011 - 39
Morningstar Advisor - August/September 2011 - Here Come ETF Managed Portfolios
Morningstar Advisor - August/September 2011 - 41
Morningstar Advisor - August/September 2011 - Circle These Picks Amid the Crop of New ETFs
Morningstar Advisor - August/September 2011 - ETF Analyst Favorites
Morningstar Advisor - August/September 2011 - Beware, the Accidental Portfolio Manager
Morningstar Advisor - August/September 2011 - 45
Morningstar Advisor - August/September 2011 - It’s the Destination, Not the Vehicle
Morningstar Advisor - August/September 2011 - 47
Morningstar Advisor - August/September 2011 - 48
Morningstar Advisor - August/September 2011 - 49
Morningstar Advisor - August/September 2011 - 50
Morningstar Advisor - August/September 2011 - 51
Morningstar Advisor - August/September 2011 - 52
Morningstar Advisor - August/September 2011 - 53
Morningstar Advisor - August/September 2011 - New Growth, Rooted in Experience
Morningstar Advisor - August/September 2011 - 55
Morningstar Advisor - August/September 2011 - 56
Morningstar Advisor - August/September 2011 - 57
Morningstar Advisor - August/September 2011 - Better Ways to Look at ETFs
Morningstar Advisor - August/September 2011 - 59
Morningstar Advisor - August/September 2011 - 60
Morningstar Advisor - August/September 2011 - 61
Morningstar Advisor - August/September 2011 - How to Better Manage Your Clients’ Future(s)
Morningstar Advisor - August/September 2011 - 63
Morningstar Advisor - August/September 2011 - 64
Morningstar Advisor - August/September 2011 - 65
Morningstar Advisor - August/September 2011 - More Bargain Than Bubble
Morningstar Advisor - August/September 2011 - 67
Morningstar Advisor - August/September 2011 - Cheap, Local, and On a Roll
Morningstar Advisor - August/September 2011 - 69
Morningstar Advisor - August/September 2011 - Mutual Fund Analyst Picks
Morningstar Advisor - August/September 2011 - 71
Morningstar Advisor - August/September 2011 - 72
Morningstar Advisor - August/September 2011 - 73
Morningstar Advisor - August/September 2011 - 50 Most Popular ETFs
Morningstar Advisor - August/September 2011 - 75
Morningstar Advisor - August/September 2011 - Undervalued Stocks With Wide Moats
Morningstar Advisor - August/September 2011 - 77
Morningstar Advisor - August/September 2011 - First-Quarter Assets Hit an All-Time High
Morningstar Advisor - August/September 2011 - 79
Morningstar Advisor - August/September 2011 - You Say You Want a Revolution?
Morningstar Advisor - August/September 2011 - Cover3
Morningstar Advisor - August/September 2011 - Cover4
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