A stock never goes up all the times because nature of the stock market is such that stock price goes up as well as down and as an investor when a good quality stock is down you should grab that stock with both hands so as to generate good returns. Ugly duckling stock is one such term used in the context of stock markets; it refers to stocks of that company which is going through a rough phase in terms of its business and stock price but due to their underlying fundamentals chances of such company getting out of a slump and performing well in future are more. In simple words ugly duckling stock is similar to that good wrestler who has lost the first round but one cannot declare him a loser as chances of him fighting back and winning the battle is there. Given below are 5 indicators which will help you in identifying ugly duckling stocks –
How to Identify Ugly Ducking Stocks
Price to Earnings Ratio
Price to earnings ratio refers to the current market price of the share divided by earning per share of the company. If the price to earnings ratio is in single digit than that stock can be considered as a good buy because the moment company or industry in which company is operating gets out of the slump than investors and traders are likely to pick that stock which has low PE ratio as compared to its peers in the industry.
Top Management of the Company
Another important factor which plays out while picking ugly duckling stocks is the top management of the company because a good quality top management having experience and expertise will go a long way in taking out company from rough patch and as an investor you should look at top management of the company because top management is like captain of the ship and no matter how good the ship is if captain is not good than ship will sink even at small weather disturbances.
Cash Flows
Companies which have consistent cash flows are more likely to be safe during trouble times as compared to those companies which have irregular cash flows because consistent cash flows implies that the company will be able to meet its day to day expenses as well as interest expenses which other companies fail to do when going gets tough for the business.
Shareholding Pattern
Another indicator is the shareholding pattern because if shareholding pattern of past 1 to 2 year suggests that promoters, as well as institutional investors, are increasing or maintaining their holding in the company than it is a case of accumulation by insiders and knowledgeable group of investors which is a signal that turnaround is around the corner for the stock in question.
Industry Trends
Another indicator is the industry in which company is operating because if company is operating in that industry the demand for products of which are on declining trend than one cannot expect stock from that industry to do well only exception being diversified companies which are not completely dependent on one industry for the sales of its products or services.
As one can see from the above that although luck plays its part in the stock market but when comes to selecting ugly duckling stocks you should look at above indicators and then decide whether to invest in such stocks or maintain distance from such stocks as any mistake in selection of ugly duckling stock for investment can lead to big losses for the investor.