An ugly duckling is a stock that is currently underperforming, but has the potential to rise again in the near term. In other words, ugly ducklings are stocks that are down, but not necessarily out. Often they are companies that have a history of performing well, and show signs of future performance not currently reflected in their stock price. An investor that is bullish on an ugly duckling will point out that it has good fundamentals such as increased dividends, strong cash flow, good management, or being in a sector that should soon rebound. On the other hand, investors that are bearish on ugly ducklings point to outdated business models, bottomed-out sales, and overwhelming competition.
There are several methods for finding potential ugly ducklings. One might look for a company with a low, single-digit price-to-earnings ratio (P/E) that has had higher P/E ratios in the past. A stock with a higher earnings yield could mean that the company is generating strong earnings in comparison to its stock price. It can also be helpful to track insider purchasing to see if a company’s senior officers are bullish on the stock. If an ugly duckling does improve, it is called a SWAN. This refers both to fate of the duckling in the Hans Christian Andersen fairy tale, and the acronym “sleep well at night.”
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