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Underperform

Posted on October 19, 2025October 20, 2025 by user

Underperform: Meaning and Examples

An investment is said to underperform when it does not keep pace with relevant benchmarks or peer securities. In a rising market, a stock that gains less than the S&P 500 (or its peer group) is underperforming; in a declining market, a stock that falls faster than the broader market is also an underperformer. Analysts also use “underperform” as a recommendation to indicate expected returns slightly below market or peer benchmarks. It is sometimes called a “weak hold” or “moderate sell.”

Key takeaways

  • Underperforming means delivering returns below a benchmark or peers.
  • The analyst rating “underperform” sits below “neutral” but above “sell” or “strong sell.”
  • Reasons for an underperform rating include weaker growth, high debt, stretched valuations, or loss of market share.
  • Brokerages may define and apply the label differently; some attach sell guidance to the rating.

How the rating compares

  • Neutral: Expected to perform in line with the broader market or benchmark.
  • Underperform: Expected to perform slightly below benchmark — smaller gains in up markets, larger losses in down markets.
  • Sell: Expected to lose value.
  • Strong sell: Significant risk of substantial losses.

Why a security might be labeled underperform

An analyst or rating model may assign “underperform” after comparing company metrics to a benchmark, an index, or peers. Common reasons include:
* Slower revenue or earnings growth than peers or the market
High leverage or deteriorating balance sheet metrics
Elevated valuation measures (e.g., price-to-earnings) relative to fundamentals
Erosion of market share or weakening competitive position
Sector or macro factors that disproportionately hurt the company

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Examples

  • Industry-level: Utilities might be labeled underperform if rising interest rates (negative for utility valuations) outweigh modest growth prospects. Similarly, REITs can shift from favorable to underperforming as interest rates rise.
  • Company-level: If an automaker posts a 12% total return while the S&P 500 returns 23% for the same period, that automaker would be considered an underperformer despite positive absolute returns.

Variation by brokerage

Definitions and implications vary across firms. Some brokerages attach sell guidance to an “underperform” outlook or use gradations such as “strongly underperform” to signal deeper concern. Always check the issuing firm’s rating scale and definitions.

Practical note for investors

Treat “underperform” as a relative signal, not an absolute instruction. Use it alongside fundamental analysis, valuation, time horizon, and your portfolio objectives to decide whether to hold, trim, or sell a position.

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