- 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.