What does 'Underperform' mean

Underperform is an analyst recommendation when a stock is expected to do slightly worse than the market return.

Also known as market underperform, moderate sell, or weak hold.

BREAKING DOWN 'Underperform'

Exact definitions vary between brokerages, but in general this rating is worse than neutral but better than sell or strong sell.

A security might receive the “underperform” designation if it does not meet or exceed a metric it compared against. This can include the overall market, a competing company, an index, or some other measure. For instance, though a company sees growth or positive earnings for a quarter or for the year, those returns might not be on a par with the market. So if an automobile manufacturer reports a total return of 12% for its fiscal year while the S&P 500 sees a 23% total return for that year, the auto manufacturer could be classified as underperform.

The rating indicates that although a company might be turning in positive results, it could be performing better in the current market.

Why a Company May Receive an Underperform Rating

A variety of issues could bring about such results. The company might be carrying debt that puts pressure on its returns.

An industry might be described as underperforming. The utilities industry might receive this designation because the growth of economy may boost the industry yet inflation could result in higher interest rates. The real estate market might have seen low interest rates drive investment in REITs, but rising rates can change that dynamic. Rental rates could be strong, yet if more inventory is about to become available it could shift the market. Those factors could create a circumstance where an industry is not generating returns to the full potential.

Depending on the brokerage house, an outlook rating of underperform can have different degrees of meaning. At Charles Schwab, for instance, an outlook of underperform also carries a sell guidance. If a company receives a strongly underperform outlook from the firm, it will also receive the sell guidance. These ratings can mean there is an expectation that the stocks will not meet benchmarks. Furthermore, if the security continues to underperform over extended periods, the holder of that stock may need to consider whether or not they should hold or sell it.

While there may be potential for a company to take action that improves its prospects and increase the value of its stock, the longer it underperforms can lead to declines that weakn their portfolio.

RELATED TERMS
  1. Outperform

    Outperform is an analyst recommendation that a stock is expected ...
  2. Market Timing

    Market timing is the attempt to beat the market by predicting ...
  3. Expected Return

    Expected return is the amount of profit or loss an investor would ...
  4. Return

    A return, in finance, is the profit or loss derived from investing ...
  5. Annual Return

    Annual return is the compound average rate of return for a stock, ...
  6. Yearly Rate Of Return Method

    The yearly rate of return method is the rate of return achieved ...
Related Articles
  1. Investing

    VCVLX, VEXPX: 3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  2. Investing

    Understanding analyst ratings

    Analysts research public financial statements, listen in on conference calls and talk to managers and the customers of a company. Discover whether analyst recommendations are really worth listening ...
  3. Financial Advisor

    Why Investors Can Be Their Own Worst Enemy

    Here are a few examples of investor behavior that contributes to portfolio underperformance.
  4. Investing

    Low-Risk vs. High-Risk Investments for Beginners

    Understanding risk is key to better investing. Determining where risk lies and knowing the difference between low risk and high risk are crucial.
  5. Investing

    Analyst Recommendations: Do Sell Ratings Exist?

    Analyst reports can be an investor's best friend - but without knowing how to read them, you won't be able to fully utilize them.
  6. Investing

    What Investors Should Know About Interest Rates

    Understanding interest rates helps you answer the fundamental question of where to put your money. Learn about the relationship between rates and stocks.
  7. Investing

    How to Evaluate Stock Performance

    Learn how to evaluate stock performance. While what you look for in a stock could be different from another person, the way you analyze performance is the same.
  8. Investing

    Will Higher Interest Rates Crush Real Estate?

    The Federal Reserve isn’t likely to raise interest rates until at least September, but real estate investors shouldn’t ignore the pending risk.
  9. Financial Advisor

    Why Positive Economic Data Pushes the Market Down

    Unemployment comes in higher than analysts’ expectations, and the market rallies 1% instead of dropping. GDP growth exceeds expectations slightly, and markets drop. Why could this be happening?
  10. Investing

    Are Structured Retail Products Too Good To Be True?

    Spot a rotten investment before you get seduced by its sweet promise of profit.
RELATED FAQS
  1. Use market risk premium for expected market return

    Find out how the expected market return rate is determined when calculating market risk premium – and how to estimate investment ... Read Answer >>
  2. What is a good annual return for a mutual fund?

    Before investing in mutual funds, it's important to understand individual goals for the investment over a specified time ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center