The 5-Sigma Report

Following a couple of articles I wrote earlier in the month about stocks making big moves, I wanted to return with some more recent, concrete examples of stocks making 5-sigma swings in price.

To briefly review: In a 5-sigma move, 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 measures 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. If you're looking at a jumpy biopharma stock that regularly dips 5% or pops 7%, it'll take a change of perhaps 30% or more to qualify as a 5-sigma move. Alternatively, a sleepy bank stock that rarely moves much at all may only need a 7% change to put it in the 5-sigma group.

As I showed in the original articles, there's no brain-dead way to play these 5-sigma moves. In other words, there's no apparent strategy for buying up all the stocks that make a 5-sigma move to the downside, or short-selling every time a stock makes a 5-sigma jump upwards. In order to get the most out of these situations, you'll need to do some homework and understand what caused the move.

Here are a few of the past week's 5-sigma stocks:

The former video-rental king, Blockbuster, has struggled the past few years against newer, nimbler competition from companies like Netflix (NASDAQ:NFLX). But it jumped more than 16% last Wednesday in pre-Turkey Day trading. While there was news out that day on a new partnership with Papa John's (NASDAQ:PZZA), and though the rumor mill was buzzing about the potential for Blockbuster to sell its Taiwan operations, it was likely a report of some nice insider buying that sent the stock soaring. A regulatory report filed after the close on Tuesday showed CEO John Antioco buying up 220,000 shares in the open market.

I end up being a bit cynical on insider buying sometimes, because insiders know what their purchases signal to the market. Plus, the more than $15 million Antioco's been paid from 2003 to 2005 (excluding stock options) means that 220,000 shares isn't an overwhelming bite for him. All the same, $1 million is $1 million, and it's probably a long shot to think that Antioco would throw that money into the wind if he didn't believe in his company. Besides, there might be more there to believe in these days. Perhaps at the urging of feisty tycoon Carl Icahn, who owns more than 15% of the company, Blockbuster looks as if it may be getting operations under control. As of its most recent 10-Q filing, the company showed a continuing downward trend for revenue, but it's starting to see more profit for its efforts.

J. Crew, the preppy clothing retailer, and Patterson Companies, a distributor in the medical equipment market, both saw their gains follow strong quarterly reports. J. Crew, which is seeing its first 5-sigma move since going public over the summer, posted strong revenue growth, margin improvement, profits that beat analysts' estimates, and higher 2006 full-year expectations. At Patterson, 8% growth in revenue and EPS over the previous year and a slight exceeding of analysts' estimates got investors all fired up.

Dover Downs, the sole buzz kill of the group, took its 10.5% haircut on no readily apparent news. The sub-$500-million operator of a slot-machine complex, hotel, and racetrack was climbing higher until July of this year, when the stock took a tumble with the rest of the market. Though it's bounced up from its September lows, a steady selling campaign from the estate of John W. Rollins, which owns around 25% of Dover, may be keeping the stock underwater.

Given that Mr. Rollins, who founded Rollins (NYSE:ROL), passed away back in 2000, it's not likely that this selling is a sign that insiders are losing faith in the company; instead, it's likely that the executor of the estate is trying to distribute its holdings. But when you have a stock that trades less than 100,000 shares per day, and an insider is trying to sell chunks of 20,000 to 50,000 shares, the price of the stock will likely get soft. So while gaming competitors like MGM, which recently got a boost from insider buying by Kirk Kerkorian, are cashing in, Dover may have trouble until insiders stop cashing out.

For related Foolishness:

• J. Crew's Foolish numbers.
• Antioco is buying up BBI.
• MGM is just plain good.

Netflix is a Motley Fool Stock Advisor pick. For more stellar stock selections from David & Tom Gardner, try Stock Advisor free for 30 days.

Fool contributor Matt Koppenheffer spent his Thanksgiving in Las Vegas, but didn't place a single bet. Go figure! He does not own shares of any of the companies mentioned. The Fool's disclosure policy is always a good bet.