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You seem to have a great bed-side manner; something I severely lack in my kelbon incarnation, but maybe not so much in the real world — perhaps I should work on it, but I think I'll stop short of adopting the personality of a large canine critter (anyway, that's already been done).

Welcome to the Fool, you already seem to be having a love-fest with some over at the BMW board. OK, honeymoon's over, here's a question:

I read your 'due diligence' process with interest here on the Value Investing board, but first caught glimpse of you over at BMW.

There was one step or process of yours — as this is the Value Board — that I expected to find, I didn't. I wonder if you would care to comment?

What I expected to see was a screening for price to fundamentals — indeed, you do mention this in passing. However, you rely to a large extent on Morningstar's Fair Value, Consider Buying, and Consider Selling price points to trigger a buy or sell signal — or so it would seem.

My issue with some of Morningstars valuations is that, if a company is clearly a great company they tend to ignore, or at least minimize the importance of the stock price to fundamentals, presumably relying more heavily on past valuations and stock-price performance?

Here's an example of what I mean. Fastenal (FAST) is on of Morningstar's favored stocks and they have a Consider Buying price on it of $53.70. This gives it a trailing p/e of 40 and a trailing price/cash flow of nearly 35 (calculated from Value Line data). At $45.07 a share Morningstar assigns it a p/e of 33.1

So, using a standard Value Investing calculation at $53.70 a share Fastenal would initially return you 2.46% on your purchase, with a reasonable expectation of a mid-teen increase every year going forward. It would take a four years before your return approached the 5% that is approximately equivalent to today's 100% government insured 1-year CD rate. So, essentially you are taking on some risk to initially achieve a return of about half of what can be had risk-free. (Initial yield is calculated, for those who don't know, by dividing the earnings by the share price (1.32 divided by 53.70 = 0.02458, which is 2.458%).

Even given Fastenal's price history this isn't a historically low valuation compared to fundamentals, in 1998 it could be had for a p/e of 19 at that years lows. Nothing seems to have fundamentally changed about the company since then. in fact in 1999, ROE and ROTC were actually a little higher than they are today.

So, there's an example and my reason why I probably would not buy Fastenal at these prices, though I would love to at the right price.

So, I'm curious to if you give more weight to Morningstar's Five Star stocks with lower, rather than higher price to fundamentals, or if all the other hurdles are passed (all being equal except for valuation) in your method they are equal — and if so, why?

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