What Is an Alpha Stock? Best Picks and Analysis

An alpha stock is a security that delivers returns above the benchmark or market index it’s compared against. This is important because it’s a key indicator of a portfolio manager’s skill in picking stocks that outperform.

You should read this article because it shows you how to identify alpha stocks and provides practical examples to help you improve your stock-picking strategy.

I’ll answer the following questions:

1. What is an alpha stock and how does it differ from the general market?
2. How is alpha calculated in stock trading?
3. What makes a stock a high alpha stock?
4. What are the key benefits of investing in high alpha stocks?
5. Which are the top high alpha stocks to consider right now?
6. How do alpha and beta stocks compare in risk and performance?
7. How does alpha factor into active vs. passive trading strategies?
8. What common misconceptions exist about alpha in stock trading?

Let’s get to the content!

What Is Alpha in Stocks?

Alpha is a metric used to quantify the performance of an investment compared to a benchmark index, such as the S&P 500. It measures how much an investment returns above or below what the benchmark would predict based on its risk level.

Positive alpha means the stock or portfolio has outperformed the market, while negative alpha indicates underperformance.

Formula for Calculating Alpha:

1. Determine the return of the investment: This includes both price appreciation and dividends, if applicable.
2. Obtain the risk-free rate: This could be the return on a government bond, for example, considered “risk-free.”
3. Find the beta of the stock: Beta measures the stock’s volatility compared to the market.
4. Calculate the expected return using the Capital Asset Pricing Model (CAPM): The formula is Expected Return = Risk-Free Rate + (Beta × Market Return).

Alpha is the difference between the investment’s actual return and the expected return from CAPM.

This method helps investors determine if their trading strategy is yielding excess returns over what the market would offer.

Using alpha in your trading strategy is a great way to improve your performance. Learn how to master any strategy you choose, whether it be identifying high alpha stocks or another approach, by watching my video below.

What Is a High Alpha Stock?

A high alpha stock is one that consistently provides returns that are significantly above the market benchmark. These stocks tend to have strong financial fundamentals, high earnings growth potential, or unique advantages in their sector.

They exhibit minimal correlation to the general market and stand out due to their capacity to outperform despite broader market conditions. Identifying these stocks requires in-depth analysis, as they often come with higher volatility and risk.

Advantages of High Alpha Stocks:

• Outperformance: They provide returns that exceed the market index.
• Portfolio Enhancement: Adding high alpha stocks can improve the overall risk-return profile of your portfolio.
• Risk-adjusted Returns: Offers better returns for a given level of risk, enhancing long-term portfolio growth.

An often overlooked aspect of high alpha stock performance is the impact of seasonal trends. For instance, the “Sell in May and Go Away” strategy highlights periods where stocks historically underperform during summer months.

However, high alpha stocks can buck this trend, continuing to outperform regardless of seasonality. To explore the track record of this seasonal strategy and its impact on alpha stocks, check out my article on the topic.

Top 8 High Alpha Stocks

The top 8 high alpha stocks on this watchlist are:

• HKG: 1830 — Perfect Medical Health Management Ltd
• IST: GWIND — Galata Wind Enerji Anonim Sirket
• OTCQX: ALVOF — Alvopetro Energy Ltd
• NASDAQ: NVDA — NVIDIA Corp
• MLBI.JK — Multi Bintang Indonesia Tbk PT
• SHA: 603688 — Jiangsu Pacific Quartz Co Ltd
• BKK: XO — Exotic Food PCL
• NASDAQ: ESEA — Euroseas Ltd

The following are some of the most popular high alpha stocks on the market…

I’m not suggesting you trade ANY of these stocks. I only trade stocks on US exchanges myself, and only if they match my favorite trade setups.

I’m just showing you what to look for.

The best traders watch more than they trade — that’s what I’m trying to model here.

Get my NO-COST WEEKLY WATCHLIST here.

Onto the picks!

Perfect Medical Health Management Ltd (HKG: 1830)

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This company operates in the healthcare sector, focusing on the management of medical services across Asia. It has seen significant growth due to increasing demand for healthcare services in aging populations.

Why It’s a High Alpha Stock:

• Exceptional growth in revenue over recent years.
• Low market correlation, offering diversification.
• Strong balance sheet with minimal debt.

Galata Wind Enerji Anonim Sirket (IST: GWIND)

A leader in renewable energy in Turkey, this company has been expanding its capacity in wind energy production, benefiting from favorable government policies and increasing demand for clean energy.

Performance Metrics:

• Rapid growth in renewable energy output.
• High return on equity (ROE) compared to industry peers.
• Positive cash flow from operations.

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Alvopetro Energy Ltd (OTCQX: ALVOF)

Alvopetro focuses on the development of energy assets in Brazil, particularly natural gas production. It has outperformed other energy stocks due to its strategic focus on high-demand regions.

Why It’s a High Alpha Stock:

• Strong earnings growth.
• Low debt-to-equity ratio.
• Increasing market share in the South American energy sector.

NVIDIA Corp (NASDAQ: NVDA)

NVIDIA, a global leader in semiconductor manufacturing, has consistently outperformed the tech sector due to its dominance in GPU technology, particularly for gaming and artificial intelligence applications.

Performance Metrics:

• Strong revenue growth driven by AI and data center demand.
• High gross margins.
• Continuous innovation keeping it ahead of competitors.

Multi Bintang Indonesia Tbk PT (MLBI.JK)

This beverage company is one of the leading producers of beer in Indonesia. Its strong brand and market presence have led to steady growth, even in volatile market conditions.

Why It’s a High Alpha Stock:

• Consistent revenue growth.
• Dominance in a growing consumer market.
• High profit margins and dividend yield.

Jiangsu Pacific Quartz Co Ltd (SHA: 603688)

A major player in the production of high-quality quartz products, particularly used in high-tech industries like semiconductors and solar panels, this company benefits from global demand for advanced technology materials.

Performance Metrics:

• Strong sales growth due to high-tech industry demand.
• High return on assets (ROA).
• Low volatility compared to peers.

Exotic Food PCL (BKK: XO)

Based in Thailand, Exotic Food produces a wide range of food products, with an emphasis on export markets. The company has benefited from the growing demand for Southeast Asian cuisine worldwide.

Why It’s a High Alpha Stock:

• Strong export growth.
• Increasing global market penetration.
• High margins in premium food categories.

Euroseas Ltd (NASDAQ: ESEA)

Operating in the shipping industry, Euroseas focuses on container shipping services. The global surge in shipping demand post-pandemic has provided a significant boost to its earnings.

Performance Metrics:

• Impressive growth in charter rates.
• Low operational costs relative to peers.
• High profit margins due to increased shipping demand.

The stocks above are great examples of high alpha stocks. If you want to find more like these you’ll need a robust trading platform that is able to screen for specific stock characteristics.

When it comes to trading platforms, StocksToTrade is first on my list. It’s a powerful platform that integrates with most major brokers. I helped to design it, which means it has all the trading indicators, news sources, and stock screening capabilities that traders like me look for in a platform.

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What Is the Difference Between Alpha and Beta Stocks?

Alpha measures a stock’s excess returns compared to the market, while beta assesses a stock’s volatility relative to the market. Alpha shows how much value a stock adds (or subtracts) from a portfolio, whereas beta shows how risky the stock is compared to the market.

Active traders seeking high alpha stocks often need to balance overnight vs. intraday buying power to optimize returns. With alpha stocks typically showing significant volatility, traders must decide whether to hold positions overnight for potential gains or focus on intraday trades for quicker profits.

The choice between these two approaches can influence the overall performance of an active trading strategy. Read my article to learn more about overnight vs. intraday buying strategies.

Key Takeaways:

• Alpha stocks aim to outperform market benchmarks.
• High alpha stocks provide excess returns, though with potential for increased volatility.
• Diversifying with both alpha and beta stocks can enhance a portfolio’s risk-return balance.

Trading isn’t rocket science. It’s a skill you build and work on like any other. Trading has changed my life, and I think this way of life should be open to more people…

I’ve built my Trading Challenge to pass on the things I had to learn for myself. It’s the kind of community that I wish I had when I was starting out.

We don’t accept everyone. If you’re up for the challenge — I want to hear from you.

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Trading is a battlefield. The more knowledge you have, the better prepared you’ll be.

Is finding high alpha stocks part of your investment strategy? Write “I’ll keep it simple Tim!” in the comments if you picked up on my trading philosophy!

Frequently Asked Questions

How Does Alpha Relate to Active and Passive Trading Strategies?

Alpha is crucial for active traders seeking to beat the market through stock selection. Passive strategies, on the other hand, aim to replicate market returns using index funds. Traders seeking alpha are more active, frequently adjusting their portfolio to capitalize on market opportunities.

In What Ways Can High Alpha Impact Long-Term Trading Outcomes?

High alpha stocks can significantly boost a portfolio’s growth, especially if managed within a well-diversified strategy. Over time, consistent alpha generation can lead to compounding returns, creating substantial long-term wealth.

What Are Some Common Misconceptions About Alpha in the Context of Stock Trading?

One misconception is that a high alpha always means low risk. In reality, high alpha often comes with higher volatility, requiring careful risk management. Another misconception is that alpha stocks will always outperform, but market conditions can change and erode that performance.

How Does Portfolio Theory Relate to Investing in High Alpha Stocks?

In finance, portfolio theory emphasizes diversification across various asset classes to balance risk and return, which is especially important when investing in high alpha stocks. These stocks can provide significant outperformance, but their volatility can elevate risk levels. By incorporating high alpha stocks into a well-diversified portfolio, you can potentially improve your portfolio’s overall risk-return profile while managing risk tolerance.

What Role Does Beta Play in Evaluating Stock Market Risk?

Beta measures a stock’s volatility in relation to the stock market, helping traders gauge how sensitive a stock is to market movements. While alpha focuses on outperformance, beta helps investors understand a stock’s risk compared to the market. Low-beta stocks are less volatile and may align with a conservative investment strategy, while high-beta stocks can offer higher returns but come with increased risk.

How Does Benchmark Return Influence Investment Strategies?

A benchmark return serves as a reference point for evaluating the performance of your investments, guiding whether a portfolio or individual stock has generated excess returns. High alpha stocks are particularly attractive because they aim to exceed these benchmark returns.

Why Are Securities Across Multiple Asset Classes Important for Risk Management?

Investing in securities across multiple asset classes, such as equities, bonds, and commodities, allows for diversification, which can mitigate risk. Different asset classes react differently to market conditions, helping balance out the overall volatility in your portfolio.