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What Does Outperform Mean in Stocks – Definition and Examples

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Written by Timothy Sykes
Updated 9/7/2023 10 min read

*Written by AI, Edited by Humans

Let’s cut to the chase. You hear the term “outperform” thrown around in articles, by analysts, and maybe even at those awkward family gatherings where Uncle Bob talks about his “portfolio.” What does outperform mean in stocks? Essentially, it means a stock or company is doing better than its peers or a benchmark index.

We’re talking about performance that’s above average, backed by earnings and growth that’s stellar compared to the competition.

Before you trade away your savings based on an “outperform” rating, hold up! Understanding what causes a stock to outperform is no less crucial than knowing the term itself. In the investing world, it’s like an advanced course: it offers insights but isn’t the full curriculum.

Let’s dive in.

What Does Outperform Mean in Stocks?

When a stock gets slapped with an “outperform” rating by an analyst, they’re essentially telling investors to keep an eye on this asset. But remember, this is relative to either its sector or an index like the S&P 500. We’re dealing with relative value here, folks.

Don’t think of an “outperform” rating as a one-size-fits-all trading recommendation. I’ve seen too many traders sink their money into stocks based solely on analyst ratings, and let me tell you, it often ends in loss. Analysts have their methodologies, and the information they provide is one tool among many.

What Causes a Stock to Outperform?

Fundamental and technical analysis form the backbone of any “outperform” rating. Analysts look at earnings, revenue, and a dozen other variables before making that call. Market conditions, industry trends, and even customer loyalty can be the X-factor that propels a stock to outperform its peers.

So you think you’ve found a gem because it’s outperforming the market? Don’t start celebrating just yet. Remember that analysts base their research on past data and a sprinkle of speculation. The truth is, their accuracy can vary. Stay vigilant.

Understanding what propels a stock to outperform involves more than just listening to analysts. It’s about recognizing patterns, like trend reversals, that can signal a change in a stock’s trajectory. These patterns can offer clues about whether a stock is likely to continue its upward climb or take a nosedive. If you’re keen on diving deeper into the mechanics of trend reversals, here’s a guide that can sharpen your understanding.

Why Outperform Is Important in Stocks Trading

An “outperform” rating isn’t just some Wall Street jargon; it’s a compass pointing investors toward potentially lucrative returns. It can be particularly helpful when you’re diversifying your portfolio with a variety of investments—from stocks and mutual funds to more complex securities.

However, let me say this loud and clear: the rating should not be your only criteria for buying a stock. Every trading strategy needs to account for risk tolerance and investment objectives. Ignore this, and you’re essentially throwing darts blindfolded.

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Examples of Outperformance

Want examples? Picture Company A in the tech sector, offering a 20% return, while the average in the sector is just 10%. Or, consider a stock that’s consistently beating the S&P 500 benchmark index. These are prime examples of outperformance.

But here’s a crucial caveat: past performance isn’t a foolproof predictor of future earnings. The economic landscape shifts. Market conditions vary. Heck, geopolitical events can suddenly turn an outperformer into an underperformer.

Outperformance isn’t just about beating averages; it’s about capitalizing on specific market behaviors. One such strategy is to “sell the rip,” where you sell a stock after a rapid upward movement to capture profits before a potential downturn. This approach can be particularly effective when dealing with stocks that have outperformed but are likely to correct. For a closer look at how to implement the “sell the rip” strategy, check out this detailed guide.

Outperformance as an Analyst Rating

An “outperform” rating often acts as a catalyst, fueling interest among individual and institutional investors alike. Ratings can range from “underperform” to “outperform,” and each financial firm has its research tools and methodologies to arrive at these conclusions.

However, one analyst’s “outperform” might be another’s “market perform.” Diverging analyst opinions give you a comprehensive picture of the stock, so take advantage of that. It’s vital to diversify your sources of information.

Is ‘Outperform’ a Good Rating for Investors?

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Sure, “outperform” sounds good, but it’s not a guarantee. The recommendation generally implies that a stock will outdo its peers in terms of returns and growth. This draws the attention of clients looking to maximize their investments.

Still, what’s good for one investor might be risky for another, depending on factors like risk tolerance and investment objectives. Due diligence isn’t optional; it’s a necessity. Double-check with other sources, compare analyst ratings, and scrutinize market trends before you make a move.

An “outperform” rating can be enticing, but it’s crucial to remember that stocks can go negative. When this happens, your trading plan needs to be robust enough to adapt. Knowing how to react when a stock goes negative can save you from significant losses and keep your portfolio healthy. If you’re wondering what steps to take when a stock goes negative, this guide has got you covered.

Key Takeaways

So what’s the big takeaway? The term “outperform” is valuable but not an end-all-be-all. It’s one part of a more extensive research and trading strategy. It’s like a useful tool in your trading toolkit, but it shouldn’t be the only one.

As you navigate through the finance world, remember that a single analyst’s rating is not a gospel. Leverage these ratings with other strategies and tools like technical indicators, fundamental analysis, and yes, your own gut instincts to make the most informed trading decisions.

Trading isn’t rocket science. It’s a skill you build and work on like any other. Trading has changed my life, and I think this way of life should be open to more people…

I’ve built my Trading Challenge to pass on the things I had to learn for myself. It’s the kind of community that I wish I had when I was starting out.

We don’t accept everyone. If you’re up for the challenge — I want to hear from you.

Apply to the Trading Challenge here.

Trading is a battlefield. The more knowledge you have, the better prepared you’ll be.

Do you trade stocks that outperform? Let me know in the comments — I love hearing from my readers!

Frequently Asked Questions

What Does ‘Outperform’ Mean for an Individual Stock?

In layman’s terms, if a stock is rated as ‘outperform,’ it’s expected to generate higher returns than its peers or a benchmark index over a specified period. The focus here is on expectations based on past performance, industry trends, and other variables.

Does Outperform Mean Buy or Sell?

When a stock gets an ‘outperform’ rating, the general implication is more on the ‘buy’ side or at least ‘hold’ if you already have it in your portfolio. But take this as advice, not gospel. Trading is complex, and your decision should involve more than just one analyst’s viewpoint.

Is Outperform Good for a Stock?

Yes, an ‘outperform’ rating is generally seen as positive. It suggests that the stock has the potential for higher returns compared to its market or sector. However, these are predictions based on existing data and can change with market conditions.

How Can an Investor Leverage ‘Outperform’ Ratings?

Using ‘outperform’ ratings as a starting point can give you a leg up in identifying potential investment opportunities. Combine this with your own analysis and perhaps even consult with a financial advisor to build a diversified portfolio.

What Are the Potential Risks Associated with ‘Outperform’ Stocks?

Just because a stock is expected to outperform doesn’t mean it’s devoid of risks. Market volatility, changes in leadership, or even geopolitical events can affect stock performance. Always read the fine print and keep an eye on market conditions.

What’s the Difference Between Buy Rating and Outperform Rating?

A buy rating generally indicates that a stock is expected to appreciate in value and thus is recommended for purchase. An outperform rating, on the other hand, means that the stock is expected to do better than the market average or its peers. While both ratings are forms of guidance, they offer different estimates and forecasts on how a stock might perform in the market.

How Do Companies and the Economy Impact Outperform Ratings?

When analysts evaluate the potential for a stock to outperform, they often look at the health and prospects of the companies in question, as well as the broader economy. The share price and the volume of shares traded can also be indicators. The stability or volatility of the security in question is another factor that can influence an outperform rating.

Where Can People Learn More About Outperform Ratings?

For those interested in understanding outperform ratings better, there are several types of content available. Trading courses often include modules that explain the criteria analysts use. These courses can also provide insights into how customers and others interpret these ratings. Various other educational resources use the term ‘market outperform’ as well, helping to clarify its meaning for people who are new to the stock market.

Do Mortgage Rates and Credit Cards Impact Outperform Ratings?

Mortgage rates and credit cards are other financial products that indirectly affect the economy. While they may not directly influence an outperform rating for a particular stock, their impact on the economy can trickle down to companies’ profitability and, by extension, their stock performance. If a company is in the business of selling these financial products, the order in which these products are favored by consumers could impact its stock’s chance to outperform.


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Author card Timothy Sykes picture

Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (205) 851-0506 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”