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 Chiquita Brands, K-Swiss, and ValueClick 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: Whole Foods Market and Verigy. The hubbub at Whole Foods was around the company's announcement of earnings for its fiscal first quarter. After a disappointment last quarter, the numbers seemed to be more agreeable for investors in this report. What was even more notable in the report, though, was the announcement that Whole Foods would be buying competitor Wild Oats (NASDAQ:OATS).

Although Mr. Market smiled on the deal when it was announced, it does raise the question of what may be ahead for Whole Foods. Last quarter, the company admitted that it was feeling the heat from competition and that margins were going to tighten. Now it appears to be turning toward acquiring a relatively large, though underperforming, competitor as a means of juicing growth. This could mean that Whole Foods thinks it can turn around Wild Oats' operations and return significant value from the deal. But it could also mean that the company is focusing on hitting aggressive top-line growth targets, even if it means bringing in less profitable business.

Verigy was also up on its earnings announcement, though the focus was more on the actual numbers. Revenue in Verigy's fiscal first quarter was $165 million, a 3% decline versus the prior year, but 6.5% more than analysts had expected. On the bottom line, the company showed a profit of $13 million, compared to a $16 million loss in the same period last year. EPS on a non-GAAP basis beat analysts' estimates by $0.03.

Verigy, which makes testing solutions for the System-on-a-Chip (SoC) and flash memory industries, was spun off from Agilent (NYSE:A) last June. Top-line growth has been lumpy on a year-over-year basis, but Verigy has upped its annual revenue to $646 million as of October 2006, from $407 million back in 2002. Profitable operations have been hit-or-miss historically, though now that it is past the separation costs and the annually recurring restructuring costs that it had under Agilent's stewardship, a profitable future looks possible.

The results for the quarter were all the more surprising since the semiconductor industry has been so soft recently. Flash memory makers like SanDisk (NASDAQ:SNDK) and Spansion (NASDAQ:SPSN) have been experiencing precipitous declines since the end of the year, while times have gotten so bad for chip maker AMD (NYSE:AMD) that its name keeps getting circulated as a private-equity buyout target.

The company sees things staying strong, though, and also gave a fairly good outlook for its quarter ending in April. At the midpoint of the range, the company expects revenue to be up to $175 million and non-GAAP EPS to $0.35. The Fools who have weighed in on Verigy in The Motley Fool's CAPS investment community are also pretty optimistic, and have rated the company four stars out of a possible five.

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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.