Outperform

Outperform is when an investment is expected to perform better than the return generated by a particular index or the overall market. Since the performance of many investments is compared to a benchmark index, outperform refers to a higher return on an investment than a particular benchmark over time. Outperform also refers to an analyst’s rating on a security. It is a better rating than neutral and worse than a strong buy recommendation.

An index is composed of securities from the same industry or of companies that have a similar size in terms of market capitalization. Smart decisions by senior management can help a company grow revenue and earnings faster than its competitors or can help bring a new product to market quickly and capture more market share. Analysts identify these conditions and use them to forecast price appreciation for high-performing companies.

Assume, for example, that XYZ mutual fund uses the Standard & Poor's 500 index as a benchmark. A portfolio manager analyzes stocks with a market capitalization similar to securities in the index and forecasts that 15 particular stocks will generate a higher rate of earnings per share (EPS) than the average for the index. Based on this analysis, the mutual fund increases its holdings in the 15 stocks that are expected to outperform the index.

A rating is an analyst’s opinion on the rate of return for a particular company’s stock, which includes the stock’s price appreciation and dividends paid to shareholders. The investment industry does not have a standard method that is used by all analysts to rate stocks. A higher rating means that the stock’s price will outperform similar companies over a specified period.

The most common use of outperform is for a rating that is above a neutral or hold rating and below a strong buy rating. Outperform means that the company will produce a better rate of return than similar companies, but the stock may not be the best performer in the index. An analyst’s performance is evaluated based on how stocks actually perform after a rating is assigned.

If a portfolio manager consistently picks stocks that outperform the benchmark, the mutual fund or exchange-traded fund will produce a higher rate of return. Money managers are ranked based on the portfolio rate of return and how those returns compare to the benchmark. Financial sites, such as Morningstar, group funds by benchmark and rank every fund in order according to its performance relative to the index. Financial sites also compare the return generated by a fund to the volatility of the portfolio over time.