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Outperforming the Market:
When a stock is said to outperform, it typically means its performance has exceeded that of a major market index, such as the S&P 500 or Dow Jones Industrial Average. This comparison is a common method to gauge a stock's success. For example, suppose the S&P 500 index has a return of 10% over a certain period, and a specific stock like Microsoft (MSFT) returns 22% in the same period. In that case, MSFT is considered to have outperformed the market by 12%.
Outperformance can also be measured within a specific sector or industry. Here, a stock's performance is compared against its industry peers. If a stock performs better than other stocks in the same sector, it is said to have outperformed its sector.
Key Drivers Behind a Company's Superior Market Performance:
In the financial news media, "outperform" is often used as a rating by analysts who research and recommend securities. When an analyst upgrades a security's rating to "outperform" from a lower rating like "market perform" or "underperform," it indicates a positive change in their analysis. This change suggests that the analyst expects the security to yield higher returns than significant market indexes in the foreseeable future.
Another way to use "outperform" is to describe how the returns of one investment compare to another. In this context, if one investment yields better returns than another, it is said to outperform the latter. It's often applied in comparing an investment's returns with a benchmark index, such as the S&P 500.
Principal Conclusions:
- Rating Scale: On a scale of 1 (best) to 5 (worst), "outperform" is likely to be rated as 2. It implies 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.
- Analyst Forecasting - Example: if a mutual fund uses the S&P 500 Index as a benchmark, and the fund's portfolio manager forecasts that certain stocks will generate a higher rate of earnings per share (EPS) than the average for the index, these stocks are expected to outperform. The fund might increase its holdings in these stocks based on this analysis.
Several companies outperform 95% of all stocks, as indicated by their high Composite Ratings.
The Composite Rating ranges from 1 (worst) to 99 (best).
- EPS Rating: This tracks annual and recent quarterly earnings, ranging from 1 (worst) to 99 (best).
- SMR Rating: This measures sales growth, profit margins, and return on equity, ranging from E (worst) to A (best).
- RS Rating: This gauges a stock's strength compared to the entire S&P 500 universe of stocks, ranging from 1 (worst) to 99 (best).
- Accumulation/Distribution Rating: This tracks institutional buying and selling in the stock over the last 13 weeks, ranging from E (worst) to A+ (best).
Companies that have recently achieved a Composite Rating of 95 or higher, thus outperforming 95% of all stocks in terms of key performance metrics, include:
- NMI Holdings Cl A: Improved its Composite Rating to 96, up from 93 (Insurance Company)
- Hillenbrand: Jumped to a Composite Rating of 96, up from 93 (Industrial Company)
- RingCentral Cl A: Increased its Composite Rating to 96, up from 93 (Technology)
- WW Grainger: It saw its composite rating rise from 92 to 96 (Industrial)
- Graham Corp: It upgraded its composite rating from 94 to 96 (Holding Company)
- Freedom Holding: It enhanced its composite rating from 94 to 96 (Investment Company)
- Jamf Holding: Elevated its Composite Rating to 96, up from 93 (Software Company)
How do you know if a stock is outperforming?
To determine if a stock is outperforming, key indicators include robust growth in revenue, EPS, and subscriber numbers, significant stock price increases, effective strategic shifts, rising market capitalization, and positive investor sentiment, as shown by market reactions and analyst ratings. These factors collectively offer a clear picture of a stock's relative market performance.
Meta Platforms Inc.:
- Stock Performance: Meta's stock soared by 194% in 2023, a significant indicator of outperformance.
- Strategic Shifts: The company's pivot to focus on Reels, VR, and AI contributed to its resurgence.
- Financial Metrics: Meta reported a year-over-year revenue increase of 23.21% in Q3 2023 and a 167.68% increase in EPS.
- Market Capitalization: Approaching a trillion-dollar valuation, Meta's market cap stood at about $989 billion, reflecting strong investor confidence.
- Future Outlook: Continued focus on AI and VR and a positive market sentiment suggest sustained growth.
Netflix Inc.:
- Subscriber & Revenue Growth: In Q4 2023, Netflix added 13.1 million subscribers, exceeding expectations, and reported $8.83 billion in revenue.
- Financial Performance: The company's net income and EPS notably improved from the previous year.
- Stock Market Response: Shares jumped in extended trading after the Q4 results announcement, indicating positive investor sentiment.
- Strategic Initiatives: Diversification into live entertainment and an ad-supported service model were key growth drivers.
- Operating Margin Forecast: Netflix revised its 2024 full-year operating margin forecast to 24%, up from 22-23%.
The scale of analyst ratings:
- Buy (Strong Buy/On the Recommended List): This rating suggests that the analyst recommends purchasing the security.
- Sell (Strong Sell): This indicates a recommendation to sell the security or liquidate the asset.
- Hold: A hold recommendation implies that the security is expected to perform in line with comparable companies or the market.
- Underperform (Moderate Sell/Weak Hold/Underweight): This rating means the stock is expected to perform slightly worse than the overall stock market return.
- Outperform (Moderate Buy/Accumulate/Overweight): This suggests that the stock is expected to do slightly better than the market return.
Tech giants have outperformed the S&P 500 since 2022:
1. Nvidia (NVDA) {{ m-tag option="price" ticker="NVDA" currency="USD" }} : Nvidia stands out as the top performer among the seven, with a total return of 54.9% since January 1, 2022. This impressive performance is largely attributed to the surging demand for artificial intelligence (AI) and Nvidia's essential graphics processing units (GPUs) for AI algorithms. Despite a significant drop in stock price in 2022, Nvidia's shares have rebounded strongly in 2023, driven by tripled revenue in its most recent quarter and expanding gross margins.
2. Microsoft (MSFT) {{ m-tag option="price" ticker="MSFT" currency="USD" }} : Microsoft has achieved a 12.2% total return since the start of 2022, making it the second-best performer. The company's recent outperformance is tied to its advancements in AI, particularly after increasing its investment in OpenAI. Microsoft Azure has become a leading cloud platform for AI developers, contributing to the company's strong growth.
Conclusion:
In conclusion, outperforming the market is a significant achievement for any stock, indicating its superior performance compared to major market indices like the S&P 500 or specific industry sectors. Companies like Nvidia and Microsoft have demonstrated this through robust financial growth, strategic initiatives, and strong market capitalization.
Analyst ratings, such as those provided by Mexem.com, play a crucial role in identifying these outperformers, offering investors insights into stocks likely to yield higher returns. This comprehensive analysis underscores the importance of considering various factors, including analyst ratings, when evaluating a stock's market performance.
The information on mexem.com is for general informational purposes only. It should not be regarded as investment advice. Investing in stocks involves risk. A stock's past performance is not a reliable indicator of its future performance. Always consult a financial advisor or trusted sources before making any investment decisions.
