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There are many independent rating companies that evaluate the benefits and risks inherent in various securities investments. Some of the more popular are Morningstar and Standard & Poor's. These rating companies can provide valuable information, but it is important to understand that no matter how expertly researched an investment is, there is always risk involved in investing. Investments ratings are based on past performance, which should not be confused with future performance. That is, just because an investment performed well in the past does not mean that it will do so in the future. There are no better examples of this than Enron and MCI Worldcom, two well respected companies that provided good returns for investors right up to the moment that they were involved in accounting scandals and imploded. Investors had no way of knowing about the improper accounting practices that these companies practiced even with access to the very best independent ratings advice. The investors of both companies suffered terrible losses, nevertheless.

Another weakness of independent rating services is that they are limited to evaluating each investment in isolation. They are not privy to the contents of your entire portfolio, and they don't know how well a given investment might fit your portfolio plan. Ratings are thus broad generalizations that may not represent the best possible advice you could follow.

Below are descriptions of two of the more prominent investment rating companies:

• Morningstar is a privately-owned company that offers financial research about companies to assist consumers in choosing investments. The companies that it reviews do not pay for the research performed. Although investment research provided by Morningstar can be very informative, there are some caveats investors should be aware of 
• Morningstar's ratings are based on past performance and cannot predict how a company will do in the future. Additionally, Morningstar information does not account for overall market trends that may come to bear on a company's individual performance.
  
• Since Morningstar does not account for market trending, a company's performance is not placed in context. Investors who rely solely on Morningstar data may be hard pressed to understand how one company is performing relative to its peers, especially if the industry as a whole is not performing well.

 

• Standard & Poor's (S&P) is a subsidiary of publishing firm McGraw-Hill that provides credit information in its approach to helping investors decide on stocks and debt instruments. By providing credit ratings, S & P rates a company's ability to repay debts, which is an overall indicator of that company's financial health. If a company rates high on S & P's credit scale, then it is considered a good buy.

S & P uses the following system to rate companies:

• Investment Grade
  
• AAA - the best quality companies, reliable and stable
• AA - quality companies, slightly higher risk than AAA
• A - economic situation can affect finance
• BBB - moderate class companies that are performing within acceptable parameters

 

• Non-Investment Grade
  
• BB - financial health directly influenced by fluctuation in the economy
• B - vacillating financial performance
• CCC - weakened financial position, relies heavily on a good economic situation to meet its obligations
• CC - highly vulnerable, very speculative bonds
• C - highly vulnerable, possibly in bankruptcy or in arrears but is making payments toward its obligations
• CI - past due on interest payments
• R - under regulatory supervision because of financial situation
• SD - has selectively defaulted on some obligations
• D - has defaulted on obligations, is likely to continue to do so
• NR - not rated

S & P's ratings should be viewed with a grain of salt and careful consideration, just like Morningstar ratings. Below are some caveats:

• Credit ratings are based on past performance and cannot predict future performance. Just because a company is able to meet debt obligations now does not mean that the same will be true next quarter or next year.

• S & P does not address a company's potential for profit and earnings. Credit ratings are a snapshot of company at a specific time and are not indicative of a company's market position. For example, two companies could have the same credit rating but one may be heavily investing in research and development while the other dose not. Clearly, the company that reinvests its profits will be more likely to perform better in the future, but a credit rating system cannot address this information.

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