Alpha: How to Gain an Edge on the Market

One of the words that you hear quite often in the investment world is “alpha”. Investopedia gives us this definition for alpha and what it means in investment terminology: “Alpha” (the Greek letter α) is a term used in investing to describe a strategy’s ability to beat the market, or it’s “edge.”

As an investor and the editor of an investment newsletter, I am always looking for alpha. I am always looking for ways to beat the market. Whether that is choosing stocks that are poised to move up more than the market or if I think the market is going to go down, I will look for investments that can buck the trend and go up—even using inverse ETFs if I think the time is right.

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My investment philosophy includes looking at three different analysis styles—fundamentals, sentiment, and technical analysis. I think you have to look at all three of the indicators from all three areas in order to get a complete picture of what is going on with the stock. The fundamentals tell you what is going on with the company itself, the technical indicators tell you what is going on with the stock, and the sentiment tells you what other investors are thinking.

Recently I wrote an article for Tickeron, an artificial intelligence-based website that I write for in addition to Bull Market Rodeo. The particular article I am referring to looked at four Dow components that were releasing earnings on Tuesday (10/22). In the article, I broke down each stock using different tools from Tickeron, Investor’s Business Daily, and The Wall Street Journal and I put the data into tables in order to make it easier to read. Here is the table with some key indicators from Tickeron.

I flagged the points that were a concern with a yellow highlight and the positive points were highlighted in green. We see that Travelers Companies (NYSE: TRV) was tagged with a yellow highlight because earnings were expected to decline. The other three stocks had various green highlights with Procter & Gamble (NYSE: PG) getting two green highlights for its Profit vs. Risk rating and its P/E Growth rating.

I also included the table below with data from Investor’s Business Daily. This table includes IBD’s composite rating, EPS rating (EPS growth), Relative Price Strength rating, and SMR rating (Sales, Profit Margin, and ROE).

In this table, we see quite a bit of green highlights. The darker green areas represent readings in the top 20% and the lighter green areas represent readings in the 60 to 79 percentile range. Notice that Procter & Gamble and United Technologies (NYSE: UTX) have all green highlights.

Finally, I shared this table with sentiment readings for the four stocks.

The analysts’ ratings for Procter & Gamble were below average and for Travelers, the ratings were well below average.

Did you notice that I didn’t mention McDonalds yet? In the first table, it had one green highlight, but it also had the highest valuation rating of the four, meaning it was closer to overvalued than undervalued. It has also had didn’t have an SMR rating from IBD at the time I did the research, and its composite rating was in the average range.

After all four companies announced earnings on Tuesday, they were moving in different directions. I took a snapshot of the returns after a few hours of trading and these were the results after the earnings reports.

The stock with the most positive attributes was Procter & Gamble and it was up 3.6% at the time of the snapshot. United Technologies had the second greatest number of positive attributes and it was up 1.12%. Travelers was the only one with any yellow tags and it was down 6.69%, while McDonalds was the most overvalued and had a number of average readings and it was down 3.12%.

Does my investment philosophy work like this all the time? Of course not. But I do believe it puts the odds of investment success in your favor. This is the way I select stocks for my own account and it is the way I choose stocks for my newsletter, The Hedged Alpha Strategy. I highly suggest that readers take a similar approach when analyzing their own investments. Look at all three analysis styles, compare stocks within an index or sector, and if it makes it easier to read, build your own tables as I did. I think it will help you find some alpha of your own.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

One comment

  1. Finally, back to stock and market analysis and some useful info. Stay away from politics, unless you’re analyzing how laws, regulations and government policies affect companies, sectors and markets.

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