When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
Stock outperform rating: Definition, meaning, examples, how a stock gets rated outperform
Ever wondered what terms like 'outperform' and 'overweight' in stock ratings really mean? Let's hop into the universe of stock analysts and ratings.
Understanding the subtleties of 'overweight' and 'outperform' ratings could ignite your interest in investing, fuel your desire to learn, and inspire you to take the first step in navigating the stock market confidently.
Understanding the subtleties of 'overweight' and 'outperform' ratings could ignite your interest in investing, fuel your desire to learn, and inspire you to take the first step in navigating the stock market confidently.
QUOTE
"The way of the successful investor is normally to do nothing - not to buy and sell all the time."
Big ideas
- Analyst ratings like 'outperform', 'market perform', and 'overweight' offer insights beyond simple buy or sell signals, revealing analysts' expectations about a stock's future performance compared to the market or sector average.
- While 'outperform' ratings suggest a stock is expected to do better than the market benchmark, terms like 'overweight' indicate analysts' belief that the stock will contribute a higher return than the typical stock in the benchmark index.
- The debate between active and passive investment strategies is ongoing, with active management aiming to outperform the market through stock picking and market timing, whereas passive management, exemplified by index funds, focuses on mirroring market performance, often with lower fees and turnover rates.
What is investment performance in the context of analyst ratings?
Definition
Investment performance refers to the evaluation of how an investment has fared over a specific period, typically measured in terms of return on investment (ROI).
This performance can be compared against various benchmarks or standards, like a market index (e.g., FTSE 100, S&P 500, or NASDAQ), to gauge the effectiveness of the investment. Performance is not just about the absolute returns but also about understanding the risk involved to achieve those returns.
What does it mean when a stock outperforms other stocks?
Definition
When a stock is said to "outperform," it implies that the stock is performing better than a certain benchmark or average, usually a market index like the FTSE 100 or the S&P 500.
This term doesn't necessarily mean the stock is generating a positive return; rather, it's about the stock's performance relative to the broader market.
EXAMPLE
If the overall market is experiencing a downturn and declines by 10%, a stock that decreases only by 5% is outperforming the market, despite the loss in its absolute value.
Conversely, in a bullish market, an outperforming stock might see gains of 10% exceeding the market average of a 5% rise in value.
Conversely, in a bullish market, an outperforming stock might see gains of 10% exceeding the market average of a 5% rise in value.
Outperformance is a key piece of jargon for you to learn and use when investing as a way to assess how a stock is expected to fare against a relevant comparison group.
What do stock analyst ratings mean?
DEFINITION
Stock analyst ratings are evaluations or recommendations provided by financial analysts regarding the expected performance of publicly traded companies' stocks.
These ratings are provided by professional analysts based on thorough research and analysis of various factors, including company fundamentals, industry conditions, and broader economic indicators.
Ratings typically fall into several categories: 'buy', 'hold', 'sell', 'overweight', 'underweight', and 'market perform', among others. These can mean different things from different analysts and the investment banks and research firms that they work for, however, they usually fit within the following spectrum:
Ratings typically fall into several categories: 'buy', 'hold', 'sell', 'overweight', 'underweight', and 'market perform', among others. These can mean different things from different analysts and the investment banks and research firms that they work for, however, they usually fit within the following spectrum:
Rating | Explanation |
Buy | The analyst believes the stock will perform well and is a potentially good investment. |
Hold | Indicates neutrality, where the stock is expected to perform in line with the market. |
Sell | Advises that the stock might not perform well in the future. |
Outperform | Indicates that the stock is expected to perform better than the market or sector average. |
Underperform | Suggests that the stock is likely to perform worse than the market or sector average. |
Overweight | Implies that the stock might offer a higher return than the average, suggesting an increased allocation. |
Underweight | Suggests a lower return than the average, indicating a reduced allocation in the portfolio. |
Market Perform | Signifies that the stock is expected to perform in line with the market average. |
Positive ratings by stock analysts
In the realm of stock analyst ratings, 'positive' typically encompasses terms like 'buy', 'outperform', and 'overweight'.
A 'buy' rating indicates strong confidence from the analyst that the stock will perform well, potentially offering higher returns than the market average. 'Outperform' is similar but more nuanced, suggesting the stock will do better than its sector peers or the broader market index.
What does overweight mean in stocks?
A 'buy' rating indicates strong confidence from the analyst that the stock will perform well, potentially offering higher returns than the market average. 'Outperform' is similar but more nuanced, suggesting the stock will do better than its sector peers or the broader market index.
What does overweight mean in stocks?
DEFINITION
Overweight, often used in portfolio management, implies that the stock could yield a higher return compared to other stocks, suggesting an increased weight or representation in one's investment portfolio.
These positive ratings signal optimism about the stock's future performance, guiding investors towards potential opportunities.
These positive ratings signal optimism about the stock's future performance, guiding investors towards potential opportunities.
Neutral ratings
Neutral ratings in stock analysis, typically termed as 'hold' or 'market perform', represent a middle ground.
A 'hold' rating suggests that analysts believe the stock will perform in line with market expectations, neither significantly outperforming nor underperforming. It implies stability rather than rapid growth or decline, indicating that current shareholders might maintain their position, but potential investors might wait for a more opportune moment.
Market perform and analyst ratings
A 'hold' rating suggests that analysts believe the stock will perform in line with market expectations, neither significantly outperforming nor underperforming. It implies stability rather than rapid growth or decline, indicating that current shareholders might maintain their position, but potential investors might wait for a more opportune moment.
Market perform and analyst ratings
DEFINITION
When a stock gets a market perform rating, it indicates that analysts expect the stock to perform roughly in line with the benchmark index, like the FTSE 100 or the NASDAQ.
This rating suggests that the stock is neither significantly undervalued nor overvalued but is expected to yield returns that are comparable to the average market performance.
It neither signals the strong growth potential typically associated with 'buy' or 'outperform' ratings, nor does it convey the caution of 'sell' or 'underperform' ratings.
This rating can be particularly relevant for investors seeking stable, market-aligned investments without the volatility associated with stocks rated more aggressively.
It neither signals the strong growth potential typically associated with 'buy' or 'outperform' ratings, nor does it convey the caution of 'sell' or 'underperform' ratings.
This rating can be particularly relevant for investors seeking stable, market-aligned investments without the volatility associated with stocks rated more aggressively.
Negative ratings
Negative ratings in the stock market, commonly expressed as 'sell', 'underperform', or 'underweight', indicate analysts' pessimism about a stock's future performance.
A 'sell' rating is straightforward; it suggests that the stock's value might decrease, advising investors to consider offloading it. 'Underperform' implies that the stock is expected to fare worse than its sector average or the broader market, signalling a potential decline or slower growth.
What does underweight mean in stocks?
A 'sell' rating is straightforward; it suggests that the stock's value might decrease, advising investors to consider offloading it. 'Underperform' implies that the stock is expected to fare worse than its sector average or the broader market, signalling a potential decline or slower growth.
What does underweight mean in stocks?
DEFINITION
Underweight in a portfolio context suggests reducing the stock's presence due to expected underperformance compared to other investments.
These ratings are crucial for investors, signalling potential risks and the need for cautious decision-making.
These ratings are crucial for investors, signalling potential risks and the need for cautious decision-making.
Examples of market outperform ratings
The website TipRanks.com collates various analyst ratings as well as sentiment gauges from other market participants and presents them graphically, like the following example for Apple (AAPL).
Source: TipranksHere Apple is rated as outperform, ranking 8 out of 10 according to the ‘smart score’ based on average analyst ratings and price targets.
Is an outperform a relevant rating to consider investing?
When a stock receives an 'outperform' rating from analysts, it is generally considered a positive indicator. But context is king - and more information is needed before considering an investment.
The analyst assigns this rating when they think the company has certain advantageous factors, such as strong financial health, innovative products, or effective management, which could drive its stock price higher than its peers.
However, it's important to contextualise this rating within the broader market scenario. An 'outperform' rating does not guarantee success, as stock performance is subject to a wide array of market forces and economic conditions.
The analyst assigns this rating when they think the company has certain advantageous factors, such as strong financial health, innovative products, or effective management, which could drive its stock price higher than its peers.
However, it's important to contextualise this rating within the broader market scenario. An 'outperform' rating does not guarantee success, as stock performance is subject to a wide array of market forces and economic conditions.
What makes a company outperform?
This is really the ultimate question in investing, and it's one that can't be succinctly answered in a single sentence. Several factors can lead a company to outperform its peers or market benchmarks. These include:
1. Innovation: Introducing groundbreaking products or services that meet market needs can significantly boost a company's performance.
2. Strong leadership: Effective, visionary leadership can steer a company towards success and outperformance.
3. Competitive advantage: Having a unique edge over competitors, whether in terms of cost, product quality, or brand strength.
4. Robust financial health: Demonstrated through solid earnings, strong cash flow, and minimal debt.
5. Responsive market strategy: The ability to adapt to market changes and consumer preferences swiftly.
1. Innovation: Introducing groundbreaking products or services that meet market needs can significantly boost a company's performance.
2. Strong leadership: Effective, visionary leadership can steer a company towards success and outperformance.
3. Competitive advantage: Having a unique edge over competitors, whether in terms of cost, product quality, or brand strength.
4. Robust financial health: Demonstrated through solid earnings, strong cash flow, and minimal debt.
5. Responsive market strategy: The ability to adapt to market changes and consumer preferences swiftly.
How do you know if a stock is outperforming?
Determining if a stock is outperforming involves comparing its performance to a relevant benchmark, such as a market index like the FTSE 100 or NASDAQ, or a sector-specific average. You can also see if one stock is outperforming another.
This chart shows NVIDIA (NVDA) stock outperforming Apple (AAPL) over a 5-year timeframe.
This chart shows NVIDIA (NVDA) stock outperforming Apple (AAPL) over a 5-year timeframe.
Source: TradingView. Past performance doesn’t guarantee future results.While the most important point of comparison is price, other factors, including dividend yields, growth rates, and earnings per share can all be considered.
Further insights into a stock's potential to continue outperforming can be gleaned from analysing the company's fundamentals. Stock analyst ratings and forecasts, which consider all these, can offer valuable perspectives.
NOTE: when stock market analysts rate a stock as 'outperform', they are referring to expected future performance, not past achievements.
Further insights into a stock's potential to continue outperforming can be gleaned from analysing the company's fundamentals. Stock analyst ratings and forecasts, which consider all these, can offer valuable perspectives.
NOTE: when stock market analysts rate a stock as 'outperform', they are referring to expected future performance, not past achievements.
Developing a solid investment strategy: Active vs passive management
Active management hinges on the idea that with enough smarts, hard work, quality market research, analysis, and forecasting - you can beat the market.
Active managers aim to capitalise on market inefficiencies and trends, seeking to generate higher returns compared to a specific benchmark. However, this approach often involves higher fees and risks, as it relies heavily on the manager's ability to make successful investment choices.
Passive management has a goal not to outperform the market, but to replicate its performance, hence the fees are generally lower. Passive investing is based on the principle that, over time, markets will deliver a positive return, making it a popular choice for long-term investors.
You can learn more about these two approaches to investing with our full guide to active vs passive investment strategies.
Active managers aim to capitalise on market inefficiencies and trends, seeking to generate higher returns compared to a specific benchmark. However, this approach often involves higher fees and risks, as it relies heavily on the manager's ability to make successful investment choices.
Passive management has a goal not to outperform the market, but to replicate its performance, hence the fees are generally lower. Passive investing is based on the principle that, over time, markets will deliver a positive return, making it a popular choice for long-term investors.
You can learn more about these two approaches to investing with our full guide to active vs passive investment strategies.
Do index funds outperform?
Index funds, by design, serve as benchmarks for measuring outperformance in the investment world, making the concept of an index fund itself outperforming somewhat of an oxymoron, as their primary goal is to mirror, not exceed, the performance of the market indices they track.
The question of whether index funds outperform actively managed funds is a topic of much debate in the investment world. Over the past couple of decades, index funds have nearly always outperformed actively managed funds as far as annual returns. This might not be telling the full story, though, because lower returns can be an acceptable outcome if they come with lower volatility than the index - meaning fewer sleepless nights!
The question of whether index funds outperform actively managed funds is a topic of much debate in the investment world. Over the past couple of decades, index funds have nearly always outperformed actively managed funds as far as annual returns. This might not be telling the full story, though, because lower returns can be an acceptable outcome if they come with lower volatility than the index - meaning fewer sleepless nights!
How do you outperform an index fund?
Active managers aim to outperform index funds by selecting stocks or other securities they believe will perform better than those in a particular index. This involves in-depth market analysis, forecasting, and the ability to identify undervalued stocks or sectors poised for growth.
Another approach is to focus on niche or specialised markets where the manager believes there is potential for higher returns than the broader market. This could involve investing in emerging markets, specific industries, or innovative technologies not fully represented in major indices.
Attempting to outperform an index fund is a fantastic challenge for any investor to undertake but should be approached with caution and a clear understanding of the associated risks and expenses.
Another approach is to focus on niche or specialised markets where the manager believes there is potential for higher returns than the broader market. This could involve investing in emerging markets, specific industries, or innovative technologies not fully represented in major indices.
Attempting to outperform an index fund is a fantastic challenge for any investor to undertake but should be approached with caution and a clear understanding of the associated risks and expenses.
Recap
'Outperform', 'overweight', and various analyst ratings like 'buy', 'hold', and 'sell' give a summary of what a professional equity analyst thinks about a stock. Various factors can contribute to a company's outperformance, and different analysts put more weight on certain factors than others, leading to a variety of ratings for the same stock. Active and passive management strategies take opposing approaches to measuring performance. While index funds try to match the performance of a benchmark, active funds try to outperform them.
FAQ
Q: What is an example of outperform?
This is when a stock achieves a higher return than its benchmark index, such as a technology stock gaining 12% when the NASDAQ index, its benchmark, gains only 8% in the same period.
Q: What does outperform mean in investing?
It means that a particular stock or investment is expected to or has achieved a higher return than a specific benchmark or average, such as a market index or sector average.
Q: How do investors outperform the market?
By making investment choices that yield higher returns than a benchmark index, like the S&P 500, often through strategies like selecting undervalued stocks, diversifying portfolios, or timing the market effectively.
Q: What does outperformance mean?
The achievement of higher returns on an investment compared to a specific benchmark or average, indicating that the investment has performed better than the standard by which it is measured.
Q: Is outperform the same as buy?
No it’s not'. 'Outperform' is an analyst rating suggesting a stock will do better than the market or sector average, while 'buy' is a more direct recommendation implying the stock is a good investment opportunity.
Q: What is outperformance in business?
It means achieving better results than competitors or industry averages, often reflected in higher sales, profits, market share, or other key performance indicators.
Q: Do growth stocks outperform?
On average growth stocks to tend to outperform so-called value stocks but the average performance disguises a much wider variation in performance among growth stocks i.e. if you pick the wrong growth stocks, you can still underperform.
Q: Why do small stocks outperform?
Small stocks have a much higher potential to outperform because they have greater potential for growth and expansion compared to larger, more established companies. Their smaller size allows for more agility and adaptation to market changes, which can lead to higher returns, albeit with increased risk. However, small companies are much more exposed to risk, meaning many small stocks will underperform large stocks.
