DISCLOSURE: THIS POST MAY CONTAIN AFFILIATE LINKS,MEANING That I GET A COMMISSION IF YOU DECIDE TO MAKE A PURCHASE THROUGH MY LINKS, AT NO COST TO YOU. PLEASE READ FULL DISCLOSURE HERE
Zacks provides Zacks Rank #1 Strong Buy stocks, research reports, and stock screener while Morningstar gives you its own proprietary stock ratings, in-depth stock research reports, stock screener, and estimated fair value to help you find high-quality undervalued stocks with long-term competitive advantage.
Which one is better, Zacks or Morningstar?
Do Zacks Rank #1 Strong Buy ratings really help you outperform the market like it claimed?
Can you really achieve good investment returns by using Morningstar stock ratings and its analysts’ research reports?
After using both Zacks and Morningstar, let me share with you what is the difference and whether they can really help you make better investment decisions.
Zacks Investment Research provides Zacks Rank #1 Strong Buy stock list which is updated every day.
Zacks’ stock ranking is founded entirely on one premise:
“Earnings estimate revisions are the most powerful force impacting stock prices.”, according to Zacks’ Founder and CEO, Len Zacks,
So, what that means is that if the stock’s earnings estimate is revised higher, then the Zacks’ rank of the stock will be high.
Zacks collects and analyzes the stocks’ earnings estimates from the brokerage analysts that follow the stocks.
Then, it uses a mathematical formula to calculate the Zacks’ Rank.
The accuracy of Zacks Rank entirely depends on how accurately the brokerage analysts can estimate the underlying company’s earnings.
On top of that, if there are very few analysts covering the stock (e.g. 2 or fewer), you need to pray that these two people really know their stuff.
There are a total of 5 different ranks:
- Zacks Rank #1 (i.e. Strong Buy)
- Zacks Rank #2 (i.e. Buy)
- Zacks Rank #3 (i.e. Hold)
- Zacks Rank #4 (i.e. Sell)
- Zacks Rank #5 (i.e. Strong Sell)
By the way, these Zacks Ranks are ONLY for short-term trading (i.e. the next 1 to 3 months), but not for long-term investment because companies release earnings every 3 months.
Below is a stock screenshot of Zacks Rank #1 strong buy stocks added on 21st Oct 2023.
As of 21st Oct 2023, there are about 233 stocks on Zacks Rank #1 list.
New stocks are being added almost every day.
These stocks could stay on the Zacks Rank #1 list for as short as days or for as long as a few months( although quite rare).
So far, only four stocks out of many that were added in May, June, and July 2023 still stay on the Zacks Rank#1 Strong Buy List.
After you get Zacks Rank #1 Strong Buy stocks, you can click on the stocks to check their style scores, financials, earnings estimates, charts, and analyst reports if any.
The Style Scores are a complementary set of indicators.
The scores are based on the trading styles of Value, Growth, and Momentum.
There’s also a VGM Score (‘V’ for Value, ‘G’ for Growth, and ‘M’ for Momentum), which combines the weighted average of the individual style scores into one score.
I welcome this addition of Style Scores, but I think you can get all these and more from Seeking Alpha Quant Ratings.
For example, this is a stock (Builders FirstSource) that was added to Zacks’s Rank #1 Strong Buy list in May 2023 and still is ranked Strong Buy as of 20th Oct 2023.
If it is a stock that Zacks Analysts cover, you will also see a research report that has the following sections:
- Short Summary
- EPS and Sales Estimates
- Company profile
- Reasons To Buy and Risks
- Latest Earnings Report
- Industry Comparison
- Analysts Earnings Model
“Short Summary”, “EPS and Sales Estimates”, “Company Profile”, and “Latest Earnings Report” are not unique insights.
“Valuation” and “Industry Comparison” are very surface-level analyses.
The “Valuation” section basically gives you P/E, P/S, and EV/EBITDA rations that you can find online easily for free.
The “Industry Comparison” section gives you a table that compares the stock against the S&P 500 and two other peers in a number of financial ratios such as P/E, P/B, P/S, EPS Growth, Cash Flow Growth, Debt/Equity, and Return on Equity.
Again, this is somewhat helpful, but it’s not unique.
“Analysts Earnings Model” is something new, but it’s simply the company’s sales and earnings forecasts using the analysts’ assumptions.
A small change in assumptions can lead to big changes in the company’s financial results.
So, I would not say this is very helpful because it could be very far off from the actual results.
The only interesting section is the “Reasons To Buy” and “Risks” section.
For example, it lists strategic acquisition and divestiture, investment in its digital platform, focus on productivity, and enough liquidity as reasons to buy. Its potential risks include high cost and supply-related constraints, stiff competition, seasonal fluctuation due to weather conditions, housing demand, and federal government actions (e.g. taxes, stimulus).
It’s nice to know the positives about the underlying companies as well as the potential risks faced.
However, after going through all this, I still don’t have confidence in this “strong buy” recommendation because this research report is still too generalized and does not really go in-depth on why you should buy this company at all.
Is it undervalued?
Does it have a high return on capital?
Does it have pricing power over its customers?
Does it have a long-term competitive advantage over its peers?
Is it still a good buy despite all the potential risks?
Basically, is it a good business at a reasonable price?
I still need answers before making a decision.
Morningstar provides a stock research and analysis platform with the following tools:
- Stock and Fund Screener
- Morningstar Analyst Independent Research Reports
- Morningstar Stock Ratings
- Stock Investment Ideas (Best Tech Stocks, Best Dividend Stocks, Best Undervalued High-Quality Companies, etc)
- Morningstar Fund Ratings & Analysts’ Reports
- Fund Investment Ideas (High-Quality Bond ETF, High-Quality Core Equity ETF, Growth ETF, etc)
- Portfolio Linking and Tracking
- Calendar (Earnings, Economic, etc)
The most unique and helpful tools provided by Morningstar are its stock ratings, its analysts’ independent research reports, and its investment ideas.
So, how exactly does Morningstar rate stocks?
Morningstar adopts a stock-picking approach that focuses on long-term advantages and intrinsic value.
To help you gauge whether or not a company has “long-term advantages” over its competitors, Morningstar provides you with economic moat ratings for each stock.
There are three types of economic moat ratings:
- Wide (i.e. highest moat rating)
Companies with a “Wide Moat” rating have the most sustainable competitive advantages.
And these companies are the best for long-term investments.
So, how do you know which wide-moat stocks you should buy and when you should buy them?
This brings us to Morningstar’s stock Star Rating.
Morningstar’s Star Rating gives you an idea of the stock’s current valuation.
In other words, it tells you whether the stock is above its fair value, below its fair value, or near fair value.
It’s calculated by comparing a stock’s current market price with Morningstar’s estimate of the stock’s fair value.
So, here’s how star ratings work.
The further the market price is below the fair value, the higher the star rating (with 5-star being the highest and 1-star being the lowest).
A 5-star rating means that the stock is trading meaningfully below fair value, which means it’s a good price to buy.
On the other hand, a 1-star or 2-star rating means that the stock is trading meaningfully above fair value.
A 3-star rating means the stock is trading near fair value.
Is Morningstar Fair Value Estimate reliable?
Morningstar calculates its fair value estimate based on its estimate of how much cash the company will generate in the future.
As you all know, no one can predict the future with 100% accuracy.
That’s why Morningstar takes into account “the predictability of company’s future cash flow”.
The less predictable (or uncertain), the higher the margin of safety is required for a 4-star or 5-star rating.
You can use the Morningstar stock screener to find stocks that have a wide moat and a 5-star rating as shown below.
This is one of my favorite places to uncover high-quality businesses that are selling at a discounted price.
If you find any stock that you are interested in, you can click on the ticker and then see the following data and information on the stock:
- Analysts’ analysis
- Fair value estimation
- Key financial ratios (growth, financial health, cash flow, etc)
- Financial statements
- Operating performance
- Management Team
The most helpful and insightful sections would be analysts’ analysis and fair value estimation.
Morningstar analysts’ analysis covers the following:
- Business strategy and outlook
- Economic moat (i.e. long-term competitive advantage)
- Fair value and profit drivers
- Risk and uncertainty
- Capital allocation
Zacks Vs Morningstar: Stock Research and Analysis Platform
In terms of stock research platforms, both Zacks and Morningstar provide all the basic financial data and ratios, stock screeners, and charting.
There are 3 main differences between Zacks and Morningstar research platforms.
The first main difference is that Zacks gives you stock ratings based on Zacks Rank which you can use for short-term trading (the next 1-3 months) while Morningstar provides stock ratings, stock fair value, and analysts’ research to help you find high-quality businesses for long-term investments.
The second one is that Zacks analysts’ company analysis only briefly talks about the reasons to buy and risks while Morningstar analysts’ company analysis goes more in-depth and talks about all the important factors such as business strategy, economic moat, fair value, and risk and uncertainty which gives me more confidence to make an investment decision.
The last main difference is that Zacks also provides Zacks Investor Collection which is another paid subscription service that gives real-time buy and sell signals from all of their long-term investor portfolios (such as Income Investor, Value Investor, Home Run Investor, Stocks Under $10, etc).
By the way, all these buy and sell signals from Zacks’ Investor Collection are based on the Zacks Rank (i.e. earnings estimates revision indicator) and also the respective investor portfolio editor’s own analysis.
On the other hand, Morningstar gives you long-term investment ideas based on your preferred style (e.g. undervalued stocks, high-quality growth stocks, high-quality dividend stocks, etc)
Zacks Vs Morningstar: Investment Performance
Zacks provides a very impressive performance track record for its hypothetical portfolio of Zacks Rank #1 Strong Buy stocks. On the other hand, Morningstar doesn’t provide specific stock recommendations, so there is no investment performance to talk about.
According to Zacks’s website, a hypothetical portfolio consisting of stocks with Zacks Rank # 1 Strong Buy stocks had an average annual return of 24.8%, compared to an average annual return of 10.9% for the S&P 500 from Jan 1, 1988, to May 2, 2022.
That is very great for a hypothetical portfolio.
Naturally, I wanted to find out how they actually measured the performance and whether this performance was indeed true.
From its disclosure on its website, I learned that this hypothetical portfolio was rebalanced monthly from Jan 1, 1988, to Dec 31st, 2013, and thereafter rebalanced weekly from Dec 31, 2013 to April 2nd, 2018, with zero transaction costs.
It didn’t give any explanation for why it suddenly changed from rebalancing monthly to weekly.
Also, there are a lot of issues with the way the returns are calculated from this hypothetical portfolio.
First of all, transaction costs are considered zero, which was not true back then.
When you buy and sell shares, there is also the bid-ask spread you have to pay.
If you take all these into account, this will reduce the returns.
In other words, the actual returns would be less.
Secondly, to measure the actual performance of Zacks’s Rank # 1 Strong Buy, shouldn’t you buy all these stocks the minute they become Zack Rank # 1 Strong Buy and sell them immediately after they are not?
Rebalancing monthly or weekly doesn’t reflect the true performance at all.
Lastly, if they are so confident about Zacks’s Rank #1 Strong Buy stocks, why not use real money to create a portfolio tracking the actual performance or at the very least use simulated trading just like Seeking Alpha to track the performance?
All in all, I have reservations about the results on its website.
Zacks Vs Morningstar: Pricing
In terms of pricing, Zacks Premium is $249/year while Morningstar Investor is priced at $34.95/month or $249/year (if billed annually).
As you can see, both are priced at the same price.
Which is better for you, Morningstar or Zacks?
If you trade stocks in the short term, you might find Zacks Rank #1 Strong Buy quite appealing.
However, I would recommend Seeking Alpha Quant Rating Strong Buy because I believe Seeking Alpha Quant Rating has a more robust methodology and it also includes Earnings Estimate Revision as one of its inputs in its ratings calculations.
If you are a value investor who prefers to do your own research, then you might find Morningstar Investor ratings and stock research reports quite useful.
Right now, there is a special promotion for Morningstar Investor for a limited time (Coupon Code”PARTNER”).
Instead of $249/year, you could get access to Morningstar Investor at only $199/year (i.e. $16.5/month)
Plus, you can give Morningstar Investor a try for free for 7 days to see if it is a good fit for you.
[Limited Time Only] Claim Your $50 OFF Morningstar Investor (Coupon Code”PARTNER”)