A couple of months ago, I wrote an article about the fat tail distribution of the stock market and how that situation can mean huge, statistically improbable moves for stocks. In a follow-up article, I talked about how we should view those moves as investors. Now I'm back at it again today, in an ongoing effort to bring to light the companies making these "5-sigma" moves.
Now just to briefly rehash, a 5-sigma move is what happens when a stock has a one-day price move that is five standard deviations or more from the stock's average one-day change. Because we're looking at the price change relative to the stock's historical volatility, it's more than just a look at the same ol' jittery stocks making the biggest absolute moves. So although First Cash Financial, Acme Packet, and China Unicom had some big percentage changes last week, you're not going to see them here because of their higher average volatility.
As I showed in my original articles on 5-sigma moves, working with these stocks isn't as easy as selling every stock that makes a big move up or buying every one that does the opposite (or vice versa). It's crucial to understand the circumstances of the move and figure out whether it is indicative of fundamental weakness in the business or whether it's just short an example of short-term trading dynamics. In some of the historical cases that I looked at, stocks continued on a major upward march even after a huge one-day move -- similarly, there were stocks that managed to continue to lose ground even after a huge one-day fall.
Here are a few of the 5-sigmas from the past week:
|
Stock
|
Date
|
Change
|
Sigmas
|
|
Telik (Nasdaq: TELK )
|
12/26/06
|
(70.7%)
|
20.5
|
|
Gorman-Rupp (AMEX: GRC )
|
12/27/06
|
18.3%
|
12.5
|
|
China Netcom (NYSE: CN )
|
12/27/06
|
17.6%
|
10.2
|
|
Penson Worldwide (Nasdaq: PNSN )
|
12/26/06
|
13.6%
|
5.3
|
Telcyta is a no-go
A risk factor in Telik's 2005 10-K filing reads: "[A]ll of our product candidates are in research and development. If clinical trials of Telcyta or Telintra are delayed or unsuccessful ... our business may suffer." Unfortunately for the company and Telik's shareholders, this is no longer a potential risk -- it's a reality. In a press release last Tuesday, the company announced that preliminary phase 3 data from trials of its leading drug candidate, Telcyta, showed no statistically significant improvement in the primary endpoint of the trials.
Telcyta was a drug designed to attack tumors in certain types of cancer such as ovarian and non-small-cell lung cancer. In a market reaction similar to another recent 5-sigma, Nuvelo (Nasdaq: NUVO ) , which lost 79% in a single day of trading after it released disappointing phase 3 data, Telik got whacked for 71% when the news came out. Also similar to Nuvelo, Telik does have other drugs in its pipeline, including Telintra, a treatment for the blood disorder myelodysplastic syndrome. The disappointment from Telcyta, though, represents the loss of a great deal of value from the company in terms of both time and money invested, as well as revenue that will never materialize.
Teddy Roosevelt said of the man who strives for great things that "if he fails, at least he fails while daring greatly." This may be cold comfort, though, for investors that now are 70% poorer than they were before this unfortunate announcement.
Put that in your pump and smoke it
Pump specialist Gorman-Rupp announced last Wednesday that its subsidiary, Patterson Pump, had received a $15 million order for eight pumps that are going to be used in New Orleans for flood control. On the news, Gorman's stock jumped 18% on six times the stock's normally thin trading volume.
Gorman has had plenty of reasons to celebrate, though. It's been a great year for Gorman investors, with the stock more than doubling in 2006. Strong fundamentals have driven the stock, with contributions from the Patterson unit in particular helping pave the way. Nine-month results that were released in late October showed sales for the first three quarters of 2006 up more than 20%, but operating and net income margins were nearly double the levels of 2005.
The $15 million in revenue that Gorman expects to recognize in mid-2007 from the New Orleans deal doesn't guarantee that next year will be as strong as this one, but it is a very sizeable order for the Patterson division that shows things continuing to move in the right direction. While the 18% gain could have been a bit excessive for this particular news, the company currently trades at 25 times trailing-12-months earnings per share, a multiple that could prove reasonable if Gorman can produce results over the next couple of years anywhere near what it did in 2006.
To merge or not to merge
Finally, it was a good 2006 for China Netcom, and investors were up 56% going into the last week of the year. Last Wednesday, it looked as though the stock was going to put a big, fat cherry on top of that monetary sundae when the stock surged 18% on rumors that the company was in talks to buy the assets of competitor China Unicom (NYSE: CHU ) . As the week wore on, though, the rumors were quickly forgotten, and the stock gave back nearly 13% of the gains in the last two trading days of the year.
More year-end Foolishness:
Fool contributor Matt Koppenheffer wishes readers a Happy New Year and hopes all of your statistical anomalies in 2007 are to the upside. He does not own shares of any of the companies mentioned. The Fool's disclosure policy is always statistically sound.
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