Some of the most common reasons for a stock to outperform the market are:
Faster than expected growth in revenue or earnings.
The company announces they are raising their dividend.
A rebound falling a period where the stock had been undervalued.
The stock is in a sector that is under pressure due to market conditions.
Point number three brings to mind an important consideration about an outperforming stock. The outperform rating should not be confused with the concept of an asset outperforming the market. That’s because outperforming the market does not always mean a positive return. For example, if the Nasdaq Composite Index is down 20 percent, but Amazon is only down 13 percent, then Amazon is said to be outperforming the market. However, an investor with money invested in Amazon would still see the value of Amazon’s stock in their portfolio decline. However, it will decline less than a fund that was tied to the NASDAQ index.
In a similar way, a stock can outperform its peers. For example, an investor could look at the stock of Lowe’s and Home Depot. If one is significantly higher than another, that stock could be said to be outperforming that stock. However, that does not necessarily mean the stock will have an outperform rating.