The 5-Sigma Report

It's time again to take a quick look at the stocks that had some major moves over the last week. Be warned, I'm not talking run-of-the-mill volatility here. I'm digging up the stocks that had 5-sigma moves last week -- normal price changes on steroids.

Just to briefly rehash, a 5-sigma move occurs when a stock has a one-day price move that is five standard deviations or more from the stock's average one-day change. This metric looks at the price change relative to the stock's historical volatility, so it's more than just a look at the stocks making the biggest absolute moves. Although Continental Airlines, NYSE Group, and Finisar had some big percentage changes last week, you won't see them here because of their typically high volatility.

As I showed in my originalarticles on 5-sigma moves, there is no pat way to play these 5-sigma moves. There doesn't appear to be a set strategy in which you can go in and buy up all the stocks that make a 5-sigma move to the downside, or short-sell every time a stock makes a 5-sigma jump upwards. In order to get the most out of these situations, it's important to understand what caused the move, and the effect that it will have on the stock going forward.

Here are a few of the 5-sigmas from the past week:

Abington goes all the way
Hailing from Jenkintown, Penn. (not far from my old stomping ground of Philadelphia), Abington Community Bancorp entered rarified air when it made a 16-sigma move this week. Shares surged to more than $19, from just less than $16 the day before. Just to be clear, in a normal distribution, a 16-sigma move has basically a zero probability of happening. Why such a big hop? On Thursday, Abington's board announced that the company would be reorganizing. It will merge Abington Community Bancorp, Abington Mutual Holding Company, and Abington Savings Bank, converting the group from a mutual holding company to a capital-stock-based organization.

Back in 2004, Abington made an initial reorganization that transformed the company from a mutual savings bank to a mutual holding company. Depositors went from owning substantially the whole company to owning a majority. The 55% that the depositors still controlled was put in the hands of the mutual holding company set up solely to hold those shares, while the other 45% was sold to the public markets (after first offering shares to any depositors that wanted them). At the time of the 2004 reorganization, the company did mention that it might eventually make the full transition to a capital stock organization. That's exactly what it did last week.

Why would Abington take this step? Because management thinks that it has made good use of the capital raised from the first 45% of the company it sold to the public. Taking the next step to make the entire company publicly held is the "logical choice," as CEO Robert White put it. Like the first offering, the shares that Abington sells will give the bank more resources, both to build the company and act as assets against which it can make new loans. Additionally, this offering will not only give more liquidity to the stock, but it also means that public shareholders are no longer minority owners; theoretically, the public shareholders now have more of a say over corporate governance.

I'm not going to pretend that I'm an expert on mutual savings banks, but I do happen to have handy a vintage 1993 copy of Peter Lynch's classic "Beating the Street," which has a illuminating chapter on savings and loans. Borrowing Lynch's expertise, I notice that the company is fairly well-capitalized, with a 12.5% equity-to-assets ratio, and non-performing loans don't appear to be a problem for the company. The fact that 23% of total loans are in construction, though -- up sharply from 4% in 2001 -- would be a red flag for Lynch, and it's certainly something to note as we go further into a real estate downturn. Furthermore, with a 0.7% return on assets and 6% return on equity on a run rate basis, and a stock price that's more than 40 times 2006 earnings projections, I doubt it would be very Lynchian of me to put this one in my portfolio.

Fantastic phase 3
Dynavax, one of those fun volatile drug stocks, had a massive 32% jump last week after it announced after the close on Tuesday that results from phase 3 tests on its hepatitis B vaccine, HEPLISAV, showed it to be more effective than competitor GlaxoSmithKline's (NYSE:GSK) Engerix-B. While protection from the vaccine outperformed Engerix-B over a range of subjects, it was notably vastly superior for people in the 56-70 age range, a group that is generally difficult to immunize.

How serious is hepatitis B? If the disease becomes chronic in the system, it can lead to liver cirrhosis and liver cancer. Behind tobacco smoke, hepatitis B is the second most prevalent cause of cancer in humans. According to the Hepatitis B Foundation, more than 12 million people have been infected in the U.S., with 100,000 new infections every year and 5,000 people dying annually from the condition. Worldwide, it's even more striking -- two billion people have been infected, 400 million chronically infected, and around one million people are dying every year from the infection. In dollar terms, Dynavax estimates that hepatitis B drugs total $1 billion annual revenue globally. With only two approved vaccines currently available, Engerix-B and Merck's (NYSE:MRK) Recombivax HB, Dynavax could see some serious revenue coming its way if it makes it through to approval.

Earnings et cetera
The other two bottle rockets and the one rock of the week all stemmed from earnings. For Donaldson, the filtration systems specialist, it appears that the stock simply lost steam. Though its first quarter was in line with analyst expectations, the stock may have gotten a bit ahead of itself when it jumped 16% (a 12-sigma move in its own right!) after the company's fourth-quarter earnings announcement. Though the stock opened above the previous close following the first-quarter results, profit-taking took over in a big way, and the stock declined 8% on the day. Later in the week, both Dress Barn and DSW beat earnings expectations, and better still, stepped up their view on the quarters ahead. Pundits have been wondering about the state of retail, especially since Wal-Mart (NYSE:WMT) has been feeling some hurt lately. But don't tell that to Dress Barn or DSW -- their business is coming up aces.

For more fast-moving Foolishness:

• Biotech gambling.
• Dynavax sees success.
• Where is retail anyway?
• DSW, Dress Barn, and Donaldson report.

NYSE Group is a Motley Fool Rule Breakers recommendation. Glaxo is a Motley Fool Income Investor pick, while Merck was a former selection of that newsletter. Wal-Mart is a Motley Fool Inside Value pick . Try any of our Foolish newsletters free for 30 days.

Fool contributor Matt Koppenheffer is happy with consistent returns, but wouldn't mind seeing one of his holdings on the 5-sigma list to the upside. He does not own shares of any of the companies mentioned. The Fool's disclosure policy is always statistically sound.