Ugly Duckling Stock

DEFINITION of 'Ugly Duckling Stock'

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.

BREAKING DOWN 'Ugly Duckling Stock'

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. Growth Stock

    Shares in a company whose earnings are expected to grow at an ...
  2. Value Stock

    A stock that tends to trade at a lower price relative to it's ...
  3. Equity Market

    The market in which shares are issued and traded, either through ...
  4. Speculative Stock

    A stock with a high degree of risk. A speculative stock often ...
  5. Stock Market

    The market in which shares of publicly held companies are issued ...
  6. Daniel P. Amos

    The chairman and CEO of insurance company Aflac (as of 2010). ...
Related Articles
  1. Retirement

    Stock Ratings: The Good, The Bad And The Ugly

    Stock ratings are both loved and reviled. Find out why they deserve equal measures of both.
  2. Investing

    Advising FAs: How To Explaining Stocks to a Client

    Without a doubt, common stocks are one of the greatest tools ever invented for building wealth.
  3. Managing Wealth

    4 Things That Make a Stock a Risky Bet

    Risk is everywhere and when it comes to stocks it can take many forms. From price risk to volatility risk, there’s a lot investors have to look out for.
  4. Markets

    Why Do Companies Care About Their Stock Prices?

    Read on to learn more about the nature of stocks and the true meaning of ownership.
  5. Investing

    How The Stock Market Works

    When you buy a stock, you buy a piece of a company.
  6. Investing

    4 Signs Your Value Stock May Be Overvalued

    Value investing can make you money, but you have to look for traps. Overvalued stocks often correct, which means investors need to know when to get out.
  7. Managing Wealth

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  8. Markets

    4 Things That Make a Stock a Safe Bet

    No investment is a sure bet, but you can reduce your chances of taking a loss by choosing fair-priced stocks with growth potential and low volatility.
  9. Markets

    The Alphabet Soup Of Stocks

    Are the countless stock categories leaving you puzzled? Here we help you sort through the confusion.
  10. Personal Finance

    The Biggest Risks of Investing in J.C. Penney Stock

    Read about some of the risks investors face by taking a position in J.C. Penney. The department store chain has had some recovery, but it has a long way to go.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    Learn how fundamental analysts use valuation measures, such as the price-to-earnings ratio, to identify when a growth stock ... Read Answer >>
  2. What is the difference between the equity market and the stock market?

    Discover the basic information about the equity, or stock, market and the two primary classifications of equities that are ... Read Answer >>
  3. Why is an increase in capital stock on a company's balance sheet a bad sign for stockholders?

    Understand what capital stock represents for a company and understand the significance for investors when a company initiates ... Read Answer >>
  4. Is maximizing stock price the same thing as maximizing profit?

    Simply put: yes. A company's stock price will factor in many different variables including the type of industry the firm ... Read Answer >>
  5. What are the types of share capital?

    Understand the characteristics of common stock and preferred stock, the two ways by which companies obtain share capital ... Read Answer >>
  6. How does the performance of the stock market affect individual businesses?

    Learn how stock markets affect individual businesses by influencing consumer spending levels and affecting the way companies ... Read Answer >>
Hot Definitions
  1. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  2. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  4. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  5. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  6. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
Trading Center