The 5-Sigma Report

The market has handed investors some nice, consistent returns over the long run, but in the short term it can often be as unpredictable as an episode of The Real World. In a pair of articles, I explored the market's so-called "fat tail" distribution -- the tendency of stocks to make huge moves that seem extremely statistically improbable. Since then, I've been following "5-sigma moves," or one-day price moves that are five standard deviations or more from a stock's average one-day change.

Keep in mind that we're looking at the price change relative to the stock's historical volatility, and not just the same old jittery "most active" stocks. So although Real Networks, Evergreen Solar, and Guess? had some big percentage changes last week, you're not going to see them here because of their higher average volatility.

Here's a taste of a few of the 5-sigmas from the past week:

As I've mentioned in prior articles, 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). Some stocks continue on a major upward march even after a huge one-day move, and some continue to lose ground even after a huge one-day fall. So you need to dig in and figure out whether the move was a result of market overreaction or of some lasting, fundamental change at the company.

To kick it off, I took a look into two of these stocks: Onyx Pharmaceuticals and Spartan Motors. Last week, Onyx jumped on news that the company is prematurely halting liver cancer trials for its drug Nexavar. The company is waiting for the American Society of Clinical Oncology meeting in June to release full results, but it did say that it saw positive results for the trial's primary endpoint, overall patient survival versus a placebo. Fellow Fool Brian Lawler broke down what sent Onyx shooting into the stratosphere last week.

Meanwhile, Spartan, a four-star selection in The Motley Fool's CAPS service that manufacturers vehicle chassis for applications such as RVs, fire trucks, military vehicles, and full emergency vehicles, showed some tasty earnings results. The year-end results that sent Spartan shooting for the stars revealed the company up 30% on the top line and more than 100% on the bottom line, despite a $2 million hit from goodwill impairment charges for its Road Rescue subsidiary.

Margins were also moving in the right direction for Spartan. For the full year, its gross margin was up to 16.5% vs. 14.2% for 2005, while the operating margin increased to 6.1% from 3.7%. Much of the success was in the chassis segment, Spartan's higher-margin business. RV chassis sales, the bulk of chassis sales, were up 8% for the year, while sales of chassis for military vehicles increased more than 300% for the year. Spartan has been working with Force Protection (NASDAQ:FRPT) and BAE Systems on the Iraqi Light Armored Vehicle (ILAV), the Joint Explosive Rapid Response Vehicle (JERRV), and the Mastiff, a Cougar variant for the British Military.

Spartan's EVTeam, the segment that manufactures emergency vehicles, also increased sales by 20% for the year. The segment was unprofitable through the first nine months of the year, but it is a solid customer for the chassis segment.

Going forward, the company expects that contributions from new product introductions in 2007, a recovery in the RV market, and further work with Force Protection and BAE will keep Spartan moving in the right direction. The one wild card for the company may be the success that it has seen in military vehicles. In 2006, $60 million of the $102 million in revenue growth for Spartan was from its sales of military vehicles. Backlog on Dec. 31 was down sequentially, but still up more than 200% from last year.

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Fool contributor Matt Koppenheffer enjoys his weekly statistical rendezvous even more than he likes watching the crazies duke it out on The Real World. He does not own shares of any of the companies mentioned. The Fool's disclosure policy is your rock of stability in a crazy world of uncertainty.