Underperform

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?

‘Underperform’ is a term used to describe a company’s stock or a mutual fund expected to perform less favorably when compared with a specific standard or benchmark index.

In what context is the term ‘Underperform’ typically used?

It is often used within the context of securities analysis, where financial analysts rate different stocks to indicate their potential future performance.

What does it mean if an analyst rates a stock as ‘Underperform’?

If a stock is rated as ‘underperform’ , it normally means that the stock is expected to do worse than the benchmark index or market average.

How does an underperforming stock affect an investor’s portfolio?

Holding stocks rated ‘underperform’ could negatively impact the overall performance of an investor’s portfolio, especially if the rest of the market is performing well.

Is it necessarily bad if a stock or a fund is marked as ‘Underperform’?

Not necessarily. Analyst predictions aren’t always accurate. It indicates a speculation of performance, it does not guarantee that a stock will perform poorly.

What factors can lead a company’s stock to ‘Underperform’?

Numerous factors such as poor management, poor financial health, lack of demand in the market, and unfavorable changes in the industry could lead to a company’s stock to ‘Underperform’.

How should investors react to ‘Underperform’ rated stocks?

Investors should carefully review the reasons behind the stock’s underperformance, and consider their own risk tolerance and investment strategy before making a decision.

Is ‘Underperform’ the worst rating a stock can get?

No, while ‘Underperform’ generally indicates a negative outlook, ratings such as ‘Sell’ or ‘Strong Sell’ are typically more negative.

Does ‘Underperform’ mean the company is failing?

Not necessarily. ‘Underperform’ simply refers to the company’s stock or securities not expected to generate returns at the same rate as other comparable stocks or market indices. It doesn’t mean that the company is failing overall.

. If a stock is underperforming, should I sell it right away?

Selling should depend on one’s individual investment strategy, financial goals, and risk tolerance. It is recommended to patiently review company’s financials, consider market trends, and potentially consult with a financial advisor before making such decisions.

Related Finance Terms

Market Perform
Outperform
Risk Assessment
Stock Downgrade
Company Valuation

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