Ugly Duckling Stock

A A A

DEFINITION

Stock in a company that is underperforming but has the potential to significantly improve. Ugly duckling stocks can be thought of as “down, but not out.” These stocks might be considered speculative investments at the moment, but they have potential to improve and turn around because the company was strong in the past and is showing current signs of strength despite a number of weaknesses.

INVESTOPEDIA EXPLAINS

Stocks that the media has described as ugly ducklings include AFLAC in 2009, Best Buy in 2012, J.C. Penney in 2013 and Caterpillar in 2013. Bears might dub a stock an ugly duckling because they think the company’s business model is dead, its sales have bottomed out, the company isn’t unique enough or it has too many competitors. Those who are bullish on ugly duckling stocks will point out their positive attributes such as increasing dividends (both presently and historically), good management, lots of cash, improving sales, a promising change in branding strategy, being in a sector that is poised to rebound or a history of above-average returns on equity. With many investors shunning or overlooking these stocks because of some depressed fundamentals, their prices drop. Ugly duckling stocks, while risky because of their currently low prices, can be potentially lucrative investments for those who think they are trading below their true value. Ugly duckling stocks that improve are said to turn into swans.

There are several ways for investors to find ugly duckling stocks. They can search for companies with a low price to earnings ratio, preferably in the single digits. They might look for a high earnings yield, which shows that the company is generating a large amount of earnings relative to its stock price. They can also look for insider purchasing activity, because when company insiders such as senior managers, directors and major shareholders are purchasing the company’s stock, it probably means good things are in store.


RELATED TERMS
  1. Dog

    One of the four categories or quadrants of the BCG Growth-Share matrix developed ...
  2. Ostrich

    A colloquial term that refers to the tendency of certain investors to ignore ...
  3. Sacred Cow

    A firmly held mainstream belief that is considered to be true without independent ...
  4. Earnings Yield

    The earnings per share for the most recent 12-month period divided by the current ...
  5. Cash Cow

    1. One of the four categories (quadrants) in the BCG growth-share matrix that ...
  6. Undervalued

    A financial security or other type of investment that is selling for a price ...
  7. Price-Earnings Ratio - P/E Ratio

    A valuation ratio of a company's current share price compared to its per-share ...
  8. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation ...
  9. Turtle

    A nickname given to a group of traders who were a part of an 1983 experiment ...
  10. Bidder

    The party offering to buy an asset from a seller at a specific price. A bidder ...
Related Articles
  1. Black Swan Events And Investment
    Investing Basics

    Black Swan Events And Investment

  2. Don't Let Stock Prices Fool You
    Active Trading

    Don't Let Stock Prices Fool You

  3. Getting To Know The Stock Exchanges
    Options & Futures

    Getting To Know The Stock Exchanges

  4. Loving Your Stocks? Don't Take This ...
    Investing Basics

    Loving Your Stocks? Don't Take This ...

  5. When To Short A Stock
    Active Trading Fundamentals

    When To Short A Stock

  6. The Auction Method: How NYSE Stock Prices ...
    Investing Basics

    The Auction Method: How NYSE Stock Prices ...

  7. The Closing Cross: How Nasdaq Stock ...
    Investing Basics

    The Closing Cross: How Nasdaq Stock ...

  8. Inflation's Impact On Stock Returns
    Investing Basics

    Inflation's Impact On Stock Returns

  9. Know Your Stock Cost Basis
    Investing Basics

    Know Your Stock Cost Basis

  10. Use Breakup Value To Find Undervalued ...
    Investing

    Use Breakup Value To Find Undervalued ...

comments powered by Disqus
Hot Definitions
  1. Quanto Swap

    A swap with varying combinations of interest rate, currency and equity swap features, where payments are based on the movement of two different countries' interest rates. This is also referred to as a differential or "diff" swap.
  2. Genuine Progress Indicator - GPI

    A metric used to measure the economic growth of a country. It is often considered as a replacement to the more well known gross domestic product (GDP) economic indicator. The GPI indicator takes everything the GDP uses into account, but also adds other figures that represent the cost of the negative effects related to economic activity (such as the cost of crime, cost of ozone depletion and cost of resource depletion, among others).
  3. Accelerated Share Repurchase - ASR

    A specific method by which corporations can repurchase outstanding shares of their stock. The accelerated share repurchase (ASR) is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company.
  4. Microeconomic Pricing Model

    A model of the way prices are set within a market for a given good. According to this model, prices are set based on the balance of supply and demand in the market. In general, profit incentives are said to resemble an "invisible hand" that guides competing participants to an equilibrium price. The demand curve in this model is determined by consumers attempting to maximize their utility, given their budget.
  5. Centralized Market

    A financial market structure that consists of having all orders routed to one central exchange with no other competing market. The quoted prices of the various securities listed on the exchange represent the only price that is available to investors seeking to buy or sell the specific asset.
  6. Balanced Investment Strategy

    A portfolio allocation and management method aimed at balancing risk and return. Such portfolios are generally divided equally between equities and fixed-income securities.
Trading Center