The term underperform is used to identify the stocks a sell-side analyst believes will disappoint investors relative to the overall market in the near term. An underperform rating is a bearish recommendation, and is associated with a stock the analyst feels investors should not add to their portfolio.
Sell-side analysts are responsible for generating periodic research reports for their clients. These reports highlight recent company news as well as projections of future earnings developed through the use of proprietary models. While these reports contain a lot of detail, they also contain a summary recommendation.
Analyst recommendations are not standardized, but they can be generalized. An underperform rating is a signal to avoid or sell a stock. These are the companies the analyst believes will not perform as well as the market, industry or competitors. In addition to underperform, similar recommendations include: Market Underperform, Underperformer, Sector Underperform, Moderate Sell, Reduce, Weak Hold and Under Weight. The analyst is essentially telling the investor the company's stock can be expected to provide lower returns than the stock market or industry over the next twelve to twenty-four months.