Peer Perform

What Is Peer Perform?

Peer perform is an investment rating that sell-side analysts use when a given security provides returns consistent with those of other companies in its sector. A peer perform is a neutral assessment; it predicts a security will move in line with similar companies.

Only a minority of sell-side research operations currently use the peer perform rating, instead of using the equivalents — hold, market perform, or neutral — to convey roughly the same sentiment. The peer perform rating roughly equates to a "hold" rating because investors do not expect the security to outperform comparable assets.

Understanding Peer Perform

The peer perform rating simply means that analysts do not expect the security to either outperform or underperform their peers. Given that sell-side research operations receive compensation based on the dollar value of trading generated by their reports, there are few economic incentives for firms to issue peer perform — or similar — ratings. Not surprisingly, the majority of ratings are considered "buy"; a smaller percentage of ratings are either peer perform or hold.

While peer perform and similar ratings sometimes are for industries and sectors, most apply to individual equities.

Bear Stearns was perhaps the best-known sell-side research operation to use the peer perform rating over the years. During the 2008 global financial crisis, JPMorgan Chase purchased its assets. As of 2021, boutique research firm Wolfe Research, which focuses on the transportation, utilities, healthcare services, energy, and consumer discretionary sectors, still uses peer perform. Wolfe uses a relative rating system, including terms such as outperform, peer perform, and underperfrm.

Some investors mistakenly confuse ratings with price targets, which provide an estimate of where analysts expect a stock to be trading in the future, either in a best-case scenario or over a set time frame. Many price targets set expectations 12 months into the future. They tend to be based on fundamental research, and do not take into account market technicals.

Note that it’s possible for a stock to carry a peer perform rating and a price target either above or below its current trading price.

Example of Peer Perform

For example, suppose that the analysts at a boutique firm covering the auto parts sector think that AutoZone has few compelling competitive advantages in the coming 12 to 18 months versus its peers, such as O’Reilly Auto Parts and Advance Auto Parts.

These analysts note that AutoZone’s operating profit margins are a little lower than the other two firms, largely due to the cost of new store openings, but only by a small single-digit percentage. The analysts expect the margin trend to stay roughly the same. They expect AutoZone’s revenue growth, in comparison, to be a fraction less than that of its rivals. The biggest difference among the retailers is the analysts think O’Reilly eventually plans a large share buyback that could boost its stock price, unlike the other two firms.

In their overall analysis, the analysts rate both AutoZone and Advance Auto as peer perform but place a buy rating on O’Reilly.