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 Adventures in Hollyhood. 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 "five-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 even though stocks like aQuantive, Heelys, and Whole Foods saw some big movement last week, you're not going to see them on this list because of their higher average volatility.

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

One important note: I've found that stocks that made five-sigma moves in the past didn't always move in a predictable fashion following the event. In other words, not all of the stocks that jumped way up turned back down, nor did all of the stocks that fell through the floor start to bounce back up.

The key is to figure out whether the big move was because of a legitimate change in the company's fortunes, or whether it was simply investor overreaction. To get a better idea on which of these stocks might be worth a deeper look, I got some help from The Motley Fool's new CAPS investing community.

Can W&T still pack a wallop?
W&T Offshore is an independent oil and natural gas producer that works primarily in the Gulf of Mexico. Historically, the company has focused on increasing its production and reserves with an eye toward maintaining an attractive return on shareholder equity. In its filings, it notes that it does not "seek to increase production and reserves for the sake of growth."

Regardless of how the company views growth, grown it has. Between 2002 and the end of 2006, W&T's total revenue was up more than fourfold, to $800 million from $191 million. Operating income has grown even faster, to $318 million in 2006 from $57 million in 2002. W&T has managed this growth through a combination of drilling programs and acquisitions -- most recently, the company spent $1.1 billion to acquire Kerr-McGee assets.

Recent performance has been less pleasing to investors, though, as the company has now whiffed on analysts' estimates for two straight quarters. For W&T's most recent quarter, which it announced last Tuesday, it showed adjusted earnings per share of $0.29, compared to the expected $0.44, and $0.79 for the first quarter of 2006. There were a number of factors the company said played into the earnings drop, including costs associated with the Kerr-McGee acquisition, hurricane remediation costs, higher interest expense, and dilution from a share offering in mid-2006.

So why is W&T still rated a perfect five stars in CAPS? Let's turn to the CAPS chatter.

• CAPS All-Star TheGarcipian likes the opportunity at Cleveland Cliffs better, but thinks the valuation and operating metrics at W&T are attractive. He also likes "the fact that the CEO owns over 50% of the shares, with insider ownership over 60%." Despite the drop in stock price over the last year, he also thinks that it is poised to come back. He notes that, "with fuel pump prices set for record highs this summer, it's only natural to think of natural gas prices going up as well."
• Another All-Star, Terch, reacted similarly to the drop in W&T's stock and said, "[W&T is a] driller that just got hammered today. I like the management experience and their ownership stake, [and I] also like the long term future for gas drillers."

So far, 387 CAPS players have chimed in on W&T, but there's always room for more. Take a stroll on over to CAPS and let the community know what you think of the opportunity at W&T. And while you're at it, check out some of the other five-sigma stocks mentioned above -- or a few of the other 4,500 stocks on CAPS.

Fool contributor Matt Koppenheffer enjoys his weekly statistical rendezvous even more than he likes watching Computer and Big Triece mix it up on Hollyhood. He does not own shares of any of the companies mentioned. Whole Foods is a Motley Fool Stock Advisor choice. Blue Nile and aQuantive are Rule Breakers picks. Blue Nile is also a Hidden Gems selection. The Fool's disclosure policy has passed the mandatory drug screening and is cleared to help you continue hitting home runs.