So Much for the Efficient Market

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Don't ask me why, but there are still eggheads out there who believe in efficient markets. The difference between yesterday and today ought to be more than enough to convince you that, if there is such a thing as market efficiency, it certainly doesn't hold over the short term.

Case in point: Motley Fool Global Gains recommendation GigaMedia (Nasdaq: GIGM). Just take a look at this chart and tell me how much sense it makes. Yesterday the stock tanked 13% on ... well, on no news at all. According to efficient market theory, there would need to be something, some bit of data, to explain the market's drastic repricing of the stock. If there was any information out there today -- and I've seen nothing to indicate that there was -- it must have been retracted, or counteracted and then some. Today, the stock has zipped back up 20%. A search for news that might explain this move turns up zilch.

The quick and drastic moves at GigaMedia may be extreme examples, but they're by no means the only ones. There are a ton of great companies out there going on sale because of our jumpy markets. One of the ways I keep tabs on them is by running a screen that looks for beaten-up, solid performers: companies with a history of revenue growth, earnings growth, and most importantly, expanding margins. That means these companies are firing on all cylinders, and getting more profitable as they take in more on the top line. Finally, I look for those that have been smacked down at least 15% from their 52-week highs. These days, this screen yields more than 100 first-class firms. These top prospects include:

Company Name	Change From 52-Week High
Apple (Nasdaq: AAPL)	(20%)
Martin Marietta Materials (NYSE: MLM)	(30%)
Deckers Outdoor (Nasdaq: DECK)	(22%)
Terra Nitrogen (NYSE: TNH)	(37%)
Vulcan Materials (NYSE: VMC)	(37%)
Potash Corp. of Saskatchewan (NYSE: POT)	(18%)

That's not to say there's no reason at all for stocks to be moving. GigaMedia is a great growth story, but let's be honest, it has had a heck of a run over the past few months. Something as simple as pessimism and profit-taking could quickly snowball into a 15% drop, but today, we see just how "justified" such movements may not be. More often than not these days, the swings are not based on data, nor any material news about a company's long-term prospects. A major proportion of the drops I'm seeing are based on fear and herd mentality, and that's exactly the kind of irrational "efficient market" action that can make you money. But only if you have the guts to buy when things get crazy.

For related Foolishness:

• Warren Buffet's Priceless Investment Advice
• The Inefficient Market Reality
• GigaMedia Isn't Evil, Just Callous