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 "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 Linear Technology, Yahoo!, and Evergreen Solar 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:

It's important to note that the stocks that made 5-sigma moves in the past didn't always move in a predictable fashion afterwards. In other words, not all the stocks that jumped way up turned back down, nor did all 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 you started considering the above group, here are some of my thoughts on Labor Ready.

Labor Ready is exactly the kind of stock that you could very easily miss if you blink. The company's market cap is just a bit more than $1 billion, and it is in the good, if not so sexy, business of placing temporary workers. Fortunately, Philip Durell of the Motley Fool Inside Value newsletter didn't blink -- he saw the value in Labor Ready after it slid almost 50% in mid-2006.

The stock's slide, which took it from a high of almost $28 in April of last year to just a hair more than $15 by the end of the summer, was due in large part to the increasing uncertainty around the residential construction industry. Because Labor Ready serves the markets for manual and unskilled labor, and a good portion of its business comes from California and Florida (two of the hottest housing markets), a downturn in construction painted a cloudy picture for Labor Ready's near future.

Of course, what's relevant at the moment is why Labor Ready was up 19% in a single day last week. It was last Thursday when Labor Ready made the jump, the day after it announced results for its first quarter. It wasn't so much that the company had a great quarter; rather, it simply didn't do nearly as badly as many had expected. Analysts had projected that the company's earnings per share would fall nearly 25% year over year, but the company, thanks in part to share buybacks, was able to put up flat EPS. Meanwhile, net income fell just 10%.

Not everyone was surprised. As I mentioned, despite (or maybe because of) the sell-off, Philip Durell was bullish on the stock, and fellow Fool Selena Maranjian picked the stock as the best small cap for 2007.

And despite the big jump, Labor Ready could be well-positioned to continue putting smiles on its shareholders' faces. The construction market isn't going to radically change in a hurry, but expectations for what the company will be able to produce have been brought way down. They may not be low enough for Labor Ready to beat estimates by 30% again, but at least nobody's expecting the impossible. The company is also still producing a healthy amount of cash and is being very opportunistic by buying back stock. Over the past year, the company has repurchased $176 million worth of stock, and it has just announced an additional $100 million repurchase program that it expects to complete by next year.

Check out what other Fools think of Labor Ready at The Motley Fool's CAPS investing community.

Yahoo! is a Stock Advisor recommendation.

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 has passed the mandatory drug screening and is cleared to help you continue hitting home runs.