What Does Underperform Mean in Stocks?

by Cindy Quarters

Stocks are typically bought for investment purposes, and they are usually given a general rating by brokers and stock analysts as a means of indicating to potential buyers what to expect from the stock. This helps buyers to decide if a specific stock or group of stocks is likely to be a good investment. Stocks that are expected to underperform don’t do as well as other stocks in the same industry.

Comparisons

In order to make a fair comparison when determining stock performance, each stock is only compared to similar stocks. This is important because industry-wide trends are likely to impact the performance of all stocks in a given industry, while having little or no impact on stocks in unrelated areas. Such consistency is a way of making sure that any comparisons between stocks are valid.

Positive Ratings

Although there are a variety of ways to rate stocks, many people find that looking at the market performance is a good way to determine if a stock should be kept or sold. Some stocks are said to outperform the market, meaning that these stocks are doing, or are anticipated to do, slightly better than most. Stocks that do extremely well are termed a strong buy, a description that indicates stock analysts believe these are stocks worth owning.

Negative Ratings

A poorly performing stock may be said to be a laggard, meaning that it does not do as well as most others in its category. Typically a laggard is also termed an underperforming stock, meaning that it is doing only slightly worse than average and that dramatic losses have not happened and are not expected to happen. While the term "underperforming" may indicate a stock that is close to but below average, the term "strong sell" indicates a stock that will likely lose a lot of value by performing well below average and is not recommended for an investor’s portfolio.

Considerations

A stock that underperforms may be doing so for various reasons. Since it is doing just slightly worse than average, it may improve its standing in the future, depending on the circumstances. The issuing company may be going through changes, temporary difficulties or have other reasons that could cause its stock to be underperforming. Often it is worthwhile to hold onto such a stock, to see if it will improve. A stock that underperforms for several years, however, may not be the best choice, and investors who hold such stocks may wish to consider selling and investing the money in something that provides better returns.

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