Underperform

Underperform is a term used by analysts to describe the situation in which a security or a financial instrument is considered less profitable than other securities in the market. The S&P 500 index is a benchmark for determining whether a stock is underperforming or not during market highs. If the price of the stock is moving down faster than the prices of other securities, this investment can be defined as underperformed. 

There are also analyst forecasts that reflect the potential of securities in relation to market dynamics. The underperform recommendation means that the potential of particular securities is below the market average. The potential of securities with the underperform rating will be 10%-15% below the industry average in the next 12 months.

Underperform explained

There are different categories of grading of stocks that are based on investment recommendations, depending on the brokerage firms.

Below are mentioned the most common ones:

• Neutral. When the price of a stock bounces within a range, analysts will turn the price movement as neutral.
• Underperform. A security is defined as an underperformer if it produces a worse return than an index or the overall stock market. The underperform rating can also be lumped in with the level of debt the company, relationship between a company's stock price and earnings per share, decrease in market share. 
• Sell. A sell rating is used when the analyst assumes the quote will decline in the next 12-18 months. 
• Strong sell. It is a type of rating used for stock trading, which is given by analysts for stocks that are expected to suffer a sharp drop, which can lead to massive losses in the stock market. 

Examples

Industries themselves can also underperform in a similar manner. For instance, low interest rates in the housing market may be the driving forces of Real Estate Investment Trusts. However, higher interest rates tend to negatively affect people's desire to invest in REITs. These factors can influence the returns of the industry and, in the end, it can receive an underperform rating. 

If an analyst believes that the stock is able to do slightly worse than other stocks in the market during a certain period of time, he assigns the stock an underperform rating. But it doesn’t mean that these stocks are automatically classified as sell. For instance, if there’s an increase in a company's sales comparing to a previous quarter's revenue, the returns may not be at the same level as ones in the market. So, if a car manufacturer announces that it made a return of 15% for a year and the total return on the S&P 500 Index was 27%, the underperform rating can be assigned to the car manufacturer.