What Is Underperform?
If an investment is underperforming, it is not keeping pace with other securities. In a rising market, for example, a stock is underperforming if it is not experiencing gains equal to or greater to the advance in the S&P 500 Index. In a down market, a stock that is a falling faster than the broader market is an underperformer. "Underperform" is also an analyst recommendation assigned to a stock when shares are expected to do slightly worse than the market return. The designation is also known as market "moderate sell" or "weak hold."
Key Takeaways
- An underpeforming stock is not keeping pace with the broader market.
- The underpeform rating can have varying meanings depending the brokerage firms issuing the rating; it is sometimes called a weak hold or moderate sell.
- An analyst will assign an underperform rating when a stock is not expected to keep pace with the market, but the worries do not justify a sell rating.
- There are a number of reasons why a stock might receive an underperform rating, but most of the time, it comes as the result of comparing company metrics to those of peers or the overall market.
Understanding the Underperform Designation
Exact definitions vary between brokerages, but an "underperform"rating is worse,in general, than "neutral" but better than "sell" or "strong sell."
- Neutral is assigned to a stock that is expected to deliver results that match the broader market.
- Underperform is a stock that will likely perform slightly below par: seeing greater losses in a down market and below-average gains in an up market.
- A sell rating is given to a stock that is expected to lose value.
- Strong sell reflects concerns that the company is in deep trouble and the stock could suffer substantial losses.
A security might receive the underperform designation if it does not meet or exceed a metric it is being compared against. The comparison might be against the overall market, a competing company, or an index. A variety of other issues could bring the underperform rating, such as concerns about the company's debt levels, price-to-earnings ratios, or loss of market share.
Examples of Underperform Rating
An industry might be described as underperforming. For example, the utilities industry might receive this designation because the growth of economy may boost the industry yet inflation could result in higher interest rates, which would be a negative for the utility sector. Similarly, the real estate market might have seen low interest rates drive investment in Real Estate Investment Trusts, but rising rates can change that dynamic. Those factors could create a circ*mstance where an industry is not generating returns to the full potential and an underperform rating is warranted.
A specific stock is assigned an underperform rating by an analyst if there are concerns that shares will not keep pace with others for various reasons, but those worries do not warrant an outright sell rating. For example, 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.
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 sellguidance. 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.
FAQs
Underperform is a rating that indicates analysts expect a stock to perform worse than the rest of the market. In most cases, underperform is the worst rating a stock can receive. But different analysts have different thresholds for how much a stock is expected to underperform by to receive this rating.
What is the meaning of underperformance? ›
to perform less well than (another of its kind, a general average, etc.) or less well than expected: Surprisingly, the stock has underperformed the market indexes all year.
What is the definition of an underperforming company? ›
What Does Underperformance in a Business Look Like. While every business has unique challenges, there are several general characteristics that may define an underperforming business: Low profit margin versus comparable businesses in that industry. Declining sales/lack of sales growth.
How do you use underperform in a sentence? ›
Firms with pension plans underperform their industry in terms of stock return performance. Suppliers that underperformed were subject to penalties, terminations, or drastic reductions in business. All schools that underperform must be turned around within two years, closed or given a fresh start.
What is underperformance in the workplace? ›
Underperformance is when an employee isn't meeting the expected standard of work. The employee may perform their expected roles and responsibilities below the required level that's set for them.
What is another word for underperforming? ›
underperform, not make the grade, not come up to scratch, underachieve, not come up to the mark (informal)
How do you explain poor performance? ›
What is poor performance? By definition, poor work performance occurs when an employee fails to fulfill the expectations or responsibilities of their job. An employee may also be underperforming if they don't reach their goals or hit certain milestones in a given time period.
What is considered underperforming? ›
Signs of underperformance include: Struggling to achieve personal objectives. Failing to meet the required performance standards for their role. Making repeated mistakes. Lacking energy and enthusiasm.
What is an example of unsatisfactory work performance? ›
Poor performance can be described as an employee who: Is absent or late to work too many times. Doesn't meet expectations or performance metrics, like not fulfilling their duties or meeting expected goals.
How to tell if you're underperforming at work? ›
Underperforming Employees: Reasons and Signs To Look Out For
- Lack of Motivation and Enthusiasm.
- Increased Absenteeism and Decreased Satisfaction Levels.
- Does not Meet the Expectations.
- Productivity Drop and low engagement levels.
- Poor Quality of Work.
Steps to evaluate underperforming employees
- Step 1: Identify performance issues. ...
- Step 2: Gather supporting evidence. ...
- Step 3: Communicate expectations. ...
- Step 4: Identify underlying causes. ...
- Step 5: Develop an employee improvement plan. ...
- Step 6: Provide support and resources. ...
- Step 7: Monitor the employee's progress.
How to Talk to an Employee About Poor Performance
- Don't put it off. ...
- Document it in writing. ...
- Provide specific examples of poor performance. ...
- Don't accuse or attack. ...
- Use the correct language. ...
- Provide solutions — and be open to their suggestions.
One of the most common reasons for underperformance is a lack of motivation. This can have several sources: Employees may have been at the company for a long time and lost interest in their work. They may lack motivation from their managers and peers.
What does strongly underperform mean? ›
If a company receives a "strongly underperform" outlook from the firm, it will also receive the sell guidance. 1 These ratings can mean there is an expectation that the stocks will not meet benchmarks.
What to do if someone is underperforming? ›
When addressing poor performance, we recommend the following.
- Calmly explain what the issue is and why you are raising it with the employee.
- Stick to the facts – don't make the issue personal or subjective.
- Describe the consequences or impact of the employee's behaviour.
- Tell the employee what is expected going forward.
“Underperform” means analysts expect weaker performance compared to the broader market. “Strong sell” is the most negative rating, reserved for stocks analysts expect to perform very poorly.
Is an underperforming stock good? ›
In a down market, a stock that is a falling faster than the broader market is an underperformer. "Underperform" is also an analyst recommendation assigned to a stock when shares are expected to do slightly worse than the market return.
Is underperform a buy or sell? ›
Underperform: A recommendation that means a stock is expected to do slightly worse than the overall stock market return. Underperform can also be expressed as "moderate sell," "weak hold," and "underweight."
What do ratings mean on Charles Schwab? ›
Schwab Equity Ratings are based upon a disciplined, systematic approach that evaluates each stock on the basis of a wide variety of investment criteria from five broad categories: Growth, Quality, Sentiment, Stability and Valuation.
