Summary - Market perform is an investment rating that analysts assign to investments (usually securities such as a stock) that they expect will provide returns that are closely in line with a benchmark index or other market average. A market perform rating is considered to be a neutral rating and is sometimes synonymous with ratings such as “neutral”, “hold” or “peer perform”. However, because a market perform rating is tied to an underlying market average, it can be positive or negative depending on the stock, the sector and many other factors. For example, a stock that was rated underperform and is now upgraded to market perform may be a good buying opportunity whereas a stock that had an overperform rating but is now rated as market perform may be a hold or even a sell depending on an investor’s objectives and risk tolerance.
Market perform is a relatively recent rating category. Some analysts will only use the ratings of overperform, market perform, and underperform which makes the meaning of market perform a little more clear. Others will include market perform with traditional buy or sell ratings that make it much more open to interpretation.
Introduction
Investors assign a great deal of weight to analysts’ recommendations. In recent years, the rating “market perform” has become common among some analysts. A market perform rating essentially means that a particular stock’s price performance is expected to closely reflect an underlying market average or index. In the spectrum of the traditional buy and sell ratings, market perform can be closer to a buy or closer to a sell. An investor’s interpretation of the market perform rating, in many cases, will require further analysis.
In this article, we’ll take a close look at the market perform rating. We’ll discuss what it means, show where it fits in the spectrum of ratings that analysts use, and use examples to show the various ways that a market perform rating can be interpreted. We’ll also give a review of who these analysts are and why their opinions are valuable to investors.
The market perform rating is given by a stock analyst to suggest a neutral outlook for a stock’s performance when compared to a benchmark index such as the S&P 500 or the Dow Jones Industrial Average (DJIA). A rating that means the same thing as market perform is “peer perform”.
Although a market perform rating usually indicates an analyst’s lukewarm view of the stock’s short-term price performance, it can be interpreted as a buy, hold, or sell signal depending on the context. For example, if a stock that is benchmarked to the Nasdaq Composite Index (IXIC) receives a market perform rating it means, in the opinion of the analyst, investors should expect that stock to perform at a pace that is virtually identical to the index. If the index rises 15 percent, an investor should expect that stock to also increase at or around a 15 percent pace. This would be a situation where a market perform can be a buy signal.
Logically then, there are times when a market perform rating can be seen as a sell signal. If the benchmark index is down, then a stock that receives a market perform rating can also be expected to decline in value.
Understanding the language of analysts
In the past, analysts gave stocks buy, hold, or sell ratings. As investing has become more sophisticated for both institutional investors and individual traders, there was a need for analysts to develop ratings that reflected the nuances and vagaries that can surround a stock at any given time.
If you look at analysts’ recommendations as a spectrum you would see the following:
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More bearish
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More bullish
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SELL
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HOLD
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BUY
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Underperform
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Outperform
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Other words used to mean the same or similar
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Strong Sell
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Moderate Sell
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Neutral
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Moderate Buy
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Strong Buy
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Weak Hold
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Market Perform
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Accumulate
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Underweight
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Sector Perform
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Overweight
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Reduce
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Peer Perform
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Add
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You can see that the categories of Underperform and Outperform, which are now commonplace do not clearly advocate selling or buying. Rather each gives directional advice such as reducing a position or adding to a position. Some analysts do in fact only use Outperform and Underperform with some term in the middle (i.e. neutral, market perform, etc.). However, some will use those terms and still have a Strong Buy rating on one end or Strong Sell rating on the other. It really depends on the analyst.
To further illustrate this, let’s look at the analyst firm BMO Capital Markets – they would be considered a buy-side analyst. Based on the first quarter 2019 earnings reports, they issued the following recommendations:
5/9/19 – Downgraded Intel (INTC) from Outperform to Market Perform
5/1/19 – Upgraded Chef’s Warehouse (CHEF) from Market Perform to Outperform
5/1/19 – Raised Target on Merck & Co. (MRK) but kept the stock as a Market Perform
4/28/19 – Upgraded AbbVie (ABBV) from Underperform to Market Perform
4/23/19 – Lowered Target on Tableau Software (DATA) but kept the stock as a Market Perform
Each of these ratings can give investors a different perspective. One of the first things to understand before trying to interpret what these ratings mean is that BMO assigns a stock one of four ratings: Outperform, Market Perform, Underperform, or Sell. They do not use the ratings Buy or Hold.
In the case of Chef’s Warehouse (CHEF), a move from market perform to outperform is a clear buying signal, as is AbbVie which moved from Underperform to Market Perform. However, in the case of Intel (INTC) the move to Market Perform may be a buy, sell, or hold since the stock was previously rated as an Outperform. If investors looked more carefully at the stock they would see that, as of that rating, the stock was up about 6% for the year. However, it had declined nearly 20% from a previous high on news of a week three-year forecast. This put the stock in an area where it was not only lagging behind the S&P 500 index which was up 15 percent, but also behind two competitors in its sector: AMD was up 47% and Nvidia was up 30%.
This leaves Merck & Co. (MRK) and Tableau Software (DATA). In the case of MRK, the earnings target was raised, but not so much as to change the rating. The opposite was true of DATA. Their earnings target was lowered, but the rating didn’t change. In both cases, investors would want to perform additional fundamental and/or technical analysis to determine what the upside potential is for each stock.
The above examples point out the primary limitation of the market perform, or any, rating. For any stock, there may be a dozen or more analysts who assign a rating. The ratings are typically one word, but those words can be different depending on the analyst. Here are some examples of the different ratings scale that analysts use:
- Raymond James: Strong Buy, Outperform, Market Perform, and Underperform
- Wells Fargo: Outperform, Market Perform, and Underperform
- JPMorgan: Overweight, Neutral, and Underweight
- Ardour Capital - Buy, Accumulate, Hold, Reduce
- ABN Amro - Buy, Add, Hold, Reduce, Sell
- Caris & Co - Buy, Above Average, Average, Below Average, Sell
The list goes on and on. And almost no two analysts use exactly the same ratings scale. And you’ll notice that in four of them the “Market Perform” rating was not used. The important takeaway for investors is that analysts may use their own nomenclature. But whatever words they use, they are attempting to give a buy, hold, or sell recommendation to their clients and the investing public.
Another limitation of the market perform rating is that it may reflect different timeframes depending on the analyst. One analyst may be projecting market average returns over 12 months. However, another analyst may only be projecting the stock results out six months, or even just 3 months. Conversely, other analysts may even look much farther out – up to 24 months. The longer the timeframe, the more their projections are bound to a range. So if a stock receives a “market perform” rating that is based on a long time frame, it could mean the analysts are saying the stock will be within 8% of the baseline index for that timeframe without giving direction on whether it will be up 8% or down 8%.
Another limitation to the market perform rating is that it can get watered down in the consensus estimate for a stock. After the release of an earnings report, a stock may receive over a dozen different analysts’ recommendations and although most analysts’ recommendations will usually be close enough to form a consensus estimate, there will almost always be one or two outlying opinions.
What does an analyst do?
An analyst looks beyond the somewhat limited guidance that companies provide to estimate future earnings. In many cases, this involves proprietary computer models and valuation calculations. But it also means doing a healthy amount of speculating based on the direction of leading economic indicators. Analysts are typically on the buy side or the sell side (more on that later) and usually work on specific stocks, usually within the same sector. They issue their ratings four times a year when corporations issue their quarterly earnings reports.
Before issuing their ratings, analysts will review a company’s balance sheet to see if their revenue and profit numbers met expectations. The balance sheet also allows them to see how much debt a company is carrying which may affect their credit ratings. Some analysts will take a deeper look at the company’s fundamentals to see if there are other factors, such as dividend payout ratio, that could affect the stock price.
Understanding the two kinds of analysts
As we mentioned above there are two kinds of analysts: buy-side analysts and sell-side analysts. Whether an analyst is buy-side or sell-side is totally dependent on which side of the transaction they are employed.
Buy-side analysts work directly for an asset manager at an investment institution such as a mutual fund company and have positions (i.e. be invested) in the stocks that they analyze. This frequently means that buy-side analysts have a vested interest in the stock they are analyzing. Sell-side analysts typically work for an institution where stocks are sold (i.e. a transaction-based firm) such as a brokerage firm. The objectivity of sell-side analysts is more frequently called into question because they may have close relationships with companies that they will subsequently assign a “buy” rating.
A market perform rating is a neutral performance rating that means, in an analyst’s opinion, a stock is expected to perform within a close relationship to a benchmark index. For example, if the Dow Jones Industrial Average (DJIA) is up 10% for the year, a stock that is benchmarked to that index and receives a market perform rating would give investors an expectation of similar performance.
When analysts provide their recommendations, they have taken the time to look at a company’s balance sheet to come up with an earnings forecast that takes into account the financial health of the company at that moment, but also where it is expected to move in the subsequent quarter.
However, any rating is only a starting point for an investor, who must still conduct their own research. And an analyst’s rating is art as much as science. As analysts have attempted to create a more nuanced picture of the stocks they analyze, they have created a slew of ratings beyond the traditional buy, sell, or hold.
A market perform rating may or may not be right for an investor’s goals or risk tolerance. If an analyst makes a market perform recommendation on a highly aggressive growth stock, it does not mean that it is an appropriate stock for a risk-averse investor to buy. Likewise, a market perform rating on a dividend-paying stock that is lagging behind other stocks in its industry or sector may be a sell signal for an aggressive investor, but may be an ideal choice for an investor who is more interested in capturing a quarterly dividend payout.
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