Under-performance

Key Takeaways

• Under-performance is used for the returns on a security which are lower than the broader market returns

• ‘Underperform’ rating is given to a stock that is known to or is expected to perform a bit below-par

• Utilities industry is often susceptible to getting an ‘underperform’ rating

What is Underperformance?

Under-performance is used for the returns on a security which are lower than the broader market returns and may be relative in its magnitude. Underperformance in a growing market means that the stock is not growing proportionately with the market. In a falling market, underperformance is when a stock falls with a greater than rate than the market.

What does Underperform rating mean?

Under-perform is a rating given to a stock by analysts or brokers. This is generally the worst rating after ‘sell’ and ‘strong sell’. Meaning of some of these designations are:

Neutral: This rating is given to a stock that is anticipated to give results in sync with the market’s performance.

Underperform: This rating is given to a stock that is known to or is expected to perform a bit below-par. It will have higher losses when the market is down and lower gains when the market is high.

Sell: This designation is allotted to a stock which is anticipated to lose value.

Strong Sell: This rating is given to a company that is facing deep trouble and its stock can suffer immense loss.

A security can receive the ‘underperform’ rating if it could not meet a benchmark of a metric like overall market, an index or a company.

Example of an Underperforming Stock

A most common example of an industry that can often get an ‘underperform’ rating is the Utilities industry. A growing economy may accelerate the industry, but inflation could cause higher interest rates which would have a negative impact on the industry.