First, assess a company's financial performance. Morningstar's grades for profitability and financial health tell you how well a firm has performed over the past five years. Companies with rising returns on assets and equity earn high letter grades for profitability. Next, consider a company's growth prospects. If a firm has grown quickly in the past, it will earn a high growth grade from Morningstar.
Future growth is even more important, however.
Also consider a firm's market position before investing in an expensive stock. The final test, and maybe the most important, is management. Dynamic, visionary leaders will earn better returns for shareholders than ho-hum executives will. Jack Welch, CEO of General Electric, has discarded low-return businesses and focused on being the best in each business GE is in, and the company's shares have appreciated 46 percent annually on average.