What Is an Underweight Stock?

By Kristi Waterworth – Updated Jan 1, 2025 at 12:40 PM EST

Key Points

Underweight stock signals it may underperform, not necessarily a sell directive.
Rebalance your portfolio if you own an underweight stock per its comparison group.
Adjust investments based on alignment with your long-term investing goals.

Stock investors have a lot of terminology to learn while also learning lots of stock-related math. It can be important to pay attention when an analyst names an "underweight stock," especially if it's one you own.

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What is an underweight stock?

The term "underweight stock" is a bit of a grandiose phrase for something that's more of a general notion. When a stock is underweight, it simply means that it's not expected to perform as well as other stocks that it's being compared to -- but that's where the rub comes in.

An underweight stock, when compared to its own industry, may be an overweight or even-weight stock when compared to the rest of its index, or vice versa. So, when you see that a stock you're holding is now underweight, you should ask yourself, "Compared to what?" And if that comparison doesn't matter to your investing thesis, don't sweat it.

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What does an underweight recommendation mean?

Many people assume an underweight recommendation for a specific stock means the same as a "sell" recommendation. It really doesn't. An underweight stock is underweight in relation to something (what that something is is wholly based on how it's being analyzed), but that doesn't mean it's not worth keeping.

An underweight stock assessment is a recommendation about how your entire portfolio should be balanced. An underweight stock recommendation doesn't mean the stock itself is actually in poor shape; it's a recommendation to reduce its weight in your portfolio.

So, if you don't hold this stock in your portfolio, it's a recommendation that doesn't mean a lot to you. If you do, and you choose to follow the recommendation, you'd rebalance your portfolio to have less weight on that particular stock, either by purchasing more of other stocks or by selling some of the stock.

Overweight vs. underweight

If an underweight stock is a stock that's underperforming on some metric when compared to something else, like its industry or its index, an overweight stock is a stock that's overperforming compared to whatever metric you're looking at. So, an overweight recommendation is a recommendation to rebalance your portfolio by increasing the weight of the portfolio in that stock -- not necessarily a recommendation to buy.

Sometimes, a stock can be both underweight and overweight at the same time, which can be confusing for investors. It's important to consider what the stock is being compared to to determine if it's under- or overweight and how that aligns with your investing goals. Once you determine what the weighting means for you, you can figure out if you want to rebalance or not.

What to do with underweight stocks

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Just because one analyst says that a stock is underweight doesn't mean you have to act on it. This is simply a way to alert investors that someone has an opinion on the value and future performance of a particular stock. Sometimes, it's glaringly obvious that the stock is in trouble. A lot of times, however, it's a much more gray area. Whether the underweighting turns out to be accurate or not will depend on a million factors, many of which are unknowable at the time of the weighting. For example, no one can really predict where the global economy or state of geopolitics will be in a year.

As with many things in life, when it comes to underweighted stocks, trust but verify.

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About the Author

Kristi Waterworth has been a contributing real estate and financial expert at The Motley Fool, covering real estate, investing, and personal finance topics, since 2020. Kristi has been interviewed by various TV media outlets and podcasts for her real estate investing expertise – from residential real estate to digital real estate and everything in between. Kristi’s journalist career spans over 25 years, and she has written about real estate investing, homeownership, and home construction specifically for the last decade. She was also previously a licensed Realtor and general building contractor before the Great Recession and housing market collapse. She holds a bachelor’s degree in American history from Columbia College in Missouri.

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