Morningstar Office divides most stocks into eight type designations - High Yield, Distressed, Hard Asset, Cyclical, Slow Growth, Classic Growth , Aggressive Growth, and, Speculative Growth - each of which defines a broad category of investment characteristics. Stocks are assigned to a type based on objective financial criteria, so stocks of the same type have similar economic fundamentals. Every stock has individual idiosyncrasies, but in general, when evaluating investments, many of the same concerns and evaluation methods will apply across the stocks in one type.
Benefit
Stock Types offer an easy way to narrow down the stock universe to those best filling specific investment needs. Stock Types also help you quickly determine the diversification level of portfolios. For instance, you might discover that most of a client’s holdings are categorized as Speculative Growth. If your client wants to lessen the portfolio’s risk, you could recommend investing in other types of stocks. And, Stock Types are yet another way to evaluate a stock. Knowing a stock is an Aggressive Growth type will suggest a group of relevant statistics to analyze.
Origin
Calculated in-house using Morningstar’s proprietary algorithm. See the definitions for individual Stock Types for further details.
For the Pros
You may notice that some stocks in our database do not have Stock Types. This is only because they do not meet the criteria needed to fit into any of the Stock Type categories. A listing of N/A (Not Applicable) under Stock Type is no reflection on the performance or underlying value of the stock itself.
What to Expect As a Company Matures
In an older issue of the Morningstar StockInvestor, senior staff writer Haywood Kelly had a few things to say about the aging process of a company, based on Morningstar Stock Types. Here’s the basic outline of the article:
Baby Steps: Speculative Growth
Don’t expect consistency from speculative growth companies. At best their profits are spotty. At worst they lose money. In fact, many companies never make it beyond speculative growth, going instead to bankruptcy court. That’s why they’re speculative. But current profitability isn’t what interests us about speculative-growth companies. It’s future profits. Hopefully, a speculative-growth company will eventually blossom into a world-class company.
The Awkward Age: Aggressive Growth
Aggressive Growth companies show a bit more maturity than their speculative-growth counterparts: They post rapid growth in profits, not just in sales—a sign of more staying power. At this point, it’s time to make some money.
Prime of Life: Classic Growth
Now we come to firms in their prime—firms with little left to prove. The best classic growers have blossomed into money machines, churning out steady growth, high returns on capital, positive free cash flows, and rising dividends. The catch is, their growth is nowhere near that of the aggressive-growth group.
Senior Citizens: Slow Growth and High Yield
These are the companies whose growth is a fading memory. Having run out of attractive investment opportunities, most of them pay out the bulk of their earnings in dividends—expect high payout ratios—rather than plow the profits back into their business.
Conclusion
While there may be an aging process for companies, there’s not one for stocks. An investor like Warren Buffet has focused on finding great stocks in and around the classic-growth category—companies like Coca-Cola (KO) and American Express (AXP). Peter Lynch was more eclectic, investing in everything from speculative growth (Dunkin’ Donuts, Pep Boys (PBY)) to slow growth (Chrysler (C)). Most of us would want a smattering of companies from across the spectrum. By putting each company in context, paying special attention to how it measures up against others in its age bracket, we can do just that. It’s one kind of age discrimination that makes eminent sense.