Definition
Underperform is a term used in financial analysis to describe a stock or an investment that is expected to do slightly worse or significantly worse than the overall market or its benchmarks. It’s often used by financial professionals to recommend a lesser allocation or to avoid such securities. In other words, underperforming stocks are not meeting the standard or the expected returns compared to others in the market.
Phonetic
The phonetic transcription of the word “Underperform” in American English is /ʌndərpərˈfɔrm/.
Key Takeaways
- Underperform is the term used when a stock or an investment is not meeting the expectations or doing as well as in comparison with the standard indices or its peers.
- This term is often used by analysts when they believe a particular stock or investment will not perform to the level expected within a certain timeframe. It does not however, suggest that the stock or investment is performing bad but implies it’s not up to par with others.
- If a stock or security is classified as underperforming, it can serve as a warning sign for investors to re-evaluate their holdings. It might suggest that it’s time to sell, but it could also imply an opportunity for buying if the investor expects the asset to bounce back.
Importance
The term “Underperform” is critical in the business/finance field because it offers insight into a company’s performance relative to its industry competitors or the wider market. The term is commonly used in stock analysis, indicating that a particular stock is not generating a satisfactory return or is likely to produce a lower return compared to others. It can serve as a key indicator for potential investors to rethink their investment strategies concerning that specific stock or company. Furthermore, underperformance can signal underlying issues within a company or industry, prompting the need for strategy re-evaluation and problem mitigation. This makes understanding and monitoring underperformance vital for both businesses and investors alike.
Explanation
The term “underperform,” commonly used in the financial and business realms, primarily serves as a key indicator of a stock’s potential or actual performance relative to other entities within the same sector or the wider market. A stock or a company is said to underperform if it does less well than expected or in comparison to its peers or a benchmark index. Investment analysts, financial advisors, or professional investors mainly use it to express their view or rating on a particular investment’s potential for future profits or earnings growth, which ultimately influences investment decisions. The purpose of rating an investment or stock as an underperformer is to aid both individual and institutional investors in formulating their investment strategies. It provides an analytical view of the investment, which can be a valuable tool when building a diversified portfolio. The ‘underperform’ rating usually serves as a suggestion for investors to sell or avoid buying the stock, because it may produce lower returns than other investments or even cause investors to lose money. However, investors should not solely depend on this rating as the deciding factor, but consider it alongside other factors such as their risk tolerance, investment goals, and the overall economic climate.
Examples
1. Kodak: Kodak, which was once a leading brand in the photographic film industry, is often cited as an example of a company that underperformed. The company failed to adapt to the digital age, and despite owning some early patents in digital photography technology, it was surpassed by competitors like Canon and Sony who adapted more quickly to market changes. Kodak’s stock price fell significantly, and the company eventually filed for bankruptcy. 2. Blackberry: The telecommunication company, which was known for producing mobile phones with physical keyboards that were popular for corporate and professional consumers, underperformed with the advent of smartphones. Despite having a significant market share before the arrival of iPhone and Android devices, Blackberry failed to innovate and keep up with competition, resulting in a significant loss of market share and decline in stock value. 3. JCPenney: Retailer JCPenney has faced difficulties in adapting to the rise of e-commerce and competitors like Amazon, leading to a significant underperformance. As consumer shopping habits changed, JCPenney’s sales decreased and its stock price dropped dramatically. Despite multiple attempts to revive the brand and its business model, JCPenney has not been able to return to its former levels of success and ultimately filed for bankruptcy in 2020.
Frequently Asked Questions(FAQ)
What does ‘Underperform’ mean in finance and business?
In what context is the term ‘Underperform’ typically used?
What does it mean if an analyst rates a stock as ‘Underperform’?
How does an underperforming stock affect an investor’s portfolio?
Is it necessarily bad if a stock or a fund is marked as ‘Underperform’?
What factors can lead a company’s stock to ‘Underperform’?
How should investors react to ‘Underperform’ rated stocks?
Is ‘Underperform’ the worst rating a stock can get?
Does ‘Underperform’ mean the company is failing?
. If a stock is underperforming, should I sell it right away?
Related Finance Terms
- Market Perform
- Outperform
- Risk Assessment
- Stock Downgrade
- Company Valuation
Sources for More Information