A couple months ago, I wrote about the fat tail distribution of the stock market, and how that can mean huge, statistically improbable moves for stocks. In a follow-up article, I went on to talk about how we should view those moves as investors. Now I'm back at it in an ongoing effort to highlight the companies making these "5-sigma" moves.
Just to recap, a 5-sigma move is when a stock has a one-day price move that is five standard deviations or more from the stock's average one-day change. Because we're looking at the price change relative to the stock's historical volatility, it's more than just a look at the same ol' jittery stocks making the biggest absolute moves. So although Symantec, LAM Research, and Knight Capital Group had some big percentage changes last week, you're not going to see them here because of their higher average volatility.
As I showed in my other articles on 5-sigma moves, working with these stocks isn't as easy as selling every stock that makes a big move up or buying every one that does the opposite (or vice versa). It's crucial to understand the circumstances of the move and figure out whether it indicates fundamental weakness in the business or if it's just short-term trading dynamics. In some of the historical cases that I looked at, stocks continued on a major upward march even after a huge one-day move; similarly, there were stocks that managed to continue to lose ground even after a huge one-day fall.
Here are a few of the 5-sigmas from the past week:
|
Stock |
Date |
Change |
Sigmas |
|---|---|---|---|
|
Mills (NYSE:MLS) |
1/17 |
26.4% |
15.8 |
|
Rackable Systems (NASDAQ:RACK) |
1/17 |
(38.4%) |
10.0 |
|
Genesis HealthCare (NASDAQ:GHCI) |
1/16 |
15.9% |
9.2 |
|
GPC Biotech (NASDAQ:GPCB) |
1/16 |
19.2% |
6.5 |
|
Total System Services (NYSE:TSS) |
1/17 |
10.3% |
5.8 |
Rackable Systems gets rocked
It's not the first time that shares of server and storage manufacturer Rackable Systems have lost more than one-third of their value in a single trading session. Back in July, the company's stock got whacked for almost 40% after second-quarter financials beat estimates, but guidance disappointed investors. What followed? Shares climbed back up 49% over the past five months.
That is, until last Wednesday, when the company issued updated fourth-quarter guidance. Revenue is expected to come in at the high end of the previously projected range, but EPS is now expected to be in a range that's about one-third lower than management's previous expectations. Because Rackable is in tight competition with companies such as Dell (NASDAQ:DELL), Hewlett-Packard (NYSE:HPQ), IBM (NYSE:IBM), and a number of privately held companies, margins on its server sales tend to stay pretty tight. For the quarter, competitive pressures and high memory prices were largely responsible for taking a bite out of the company's earnings.
Call me naive, but I have to wonder whether this one bit of info is enough for investors to make a such a big revaluation of the stock. If revenue comes in at the midpoint of the new range, it would be 28% greater year over year. And though EPS looks like it'll be down year over year for the fourth quarter, full-year diluted EPS will likely rise 20% or more from the previous year. For anyone who has perused Rackable's 10-K, the very first risk factor reads, "Our quarterly operating results have fluctuated significantly in the past, and we believe that they will continue to fluctuate in the future, due to a number of factors." In other words, because of the lumpiness inherent in Rackable's business, the company is very vulnerable to quarterly fluctuations -- but don't tell that to all the investors judging companies on a "what have you done for me lately" quarterly basis.
I wouldn't call missing profit guidance an encouraging sign by any means, but, especially for a company in a business like Rackable's, a more patient wait-and-see approach can be worthwhile. At a bit more than 20 times trailing EPS, I don't see the stock as overly cheap, but growing the way it has been, it seems like a pretty reasonable price. And just remember, if it weren't for unwarranted pessimism and overreactions, there would be no room to make money in the stock market much above whatever government paper pays out -- and that's good for no one.
Mills: Take a breather!
Mills made the 5-Sigma Report last week, tumbling 22% because it had hinted at the possibility of seeking bankruptcy protection. Not satisfied with just a little limelight, the company continued to bounce around last week, logging not one, but two more 5-sigma moves.
After Mills let the b-word slip, the two largest shareholders -- Farallon Partners and Gazit-Globe -- offered it funds to recapitalize. As encouraging as this was to investors, the announcement on the 17th that the company will be purchased by Brookfield Asset Management was even more encouraging. Investors appear to be expecting that the $21-per-share offer will stand, though there is still speculation that competing offers could emerge for the real estate investment trust. From 22% lower to 18% higher in the course of just two weeks -- and with most of the movement on just three trading days -- Mills is not only keeping investors on their toes, but reminding us that what goes down can come back up. And sometimes, it can happen very quickly.
More related Foolishness:
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Fool contributor Matt Koppenheffer encourages reader feedback and loves to hear about sweet statistical anomalies, Penn State football, and anything with jalapenos as an ingredient. He owns shares of Dell, but does not own shares of any of the other companies mentioned. The Fool's disclosure policy is always statistically sound.
