Although the market has handed investors some nice, consistent returns over the short term, it can often be as unpredictable as an episode of The Real World in the long run. One feature of the market that I looked at in a pair of articles is the so-called "fat tail distribution," a term referring to stocks' tendencies to make huge moves that seem extremely statistically improbable.
What I've been following are "5-sigma moves," or one-day price moves that are five standard deviations or more from a stock's average one-day change. Because we're looking at the price change relative to the stock's historical volatility, we're doing more than just looking at the same ol' jittery stocks making the most-actives list. So although MEMC Electronic Materials, Conexant, and Corning 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 original 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. In some of the historical cases I looked at, stocks continued on a major upward march even after a huge one-day move -- and similarly, there were stocks that managed to continue to lose ground even after a huge one-day fall. So you need to dig in and figure out whether the move was a market overreaction or a lasting positive (or negative) fundamental change at the company.
Here are a few of the 5-sigmas from the past week:
|
Stock |
Date |
Change |
Sigmas |
|---|---|---|---|
|
21st Century Insurance Group |
1/25/07 |
26.2% |
15.0 |
|
LECG |
1/26/07 |
(23.1%) |
11.7 |
|
Novelis |
1/26/07 |
23.6% |
10.2 |
|
National Interstate Group |
1/24/07 |
22.5% |
8.6 |
|
Technitrol |
1/26/07 |
(16.1%) |
6.0 |
A national niche
One of the stocks from this list that caught my interest is the insurer National Interstate Group. Though massive markets exist out there for mainstream insurance products such as consumer auto, health, life, and property, the competitive landscape is intense, and the big boys typically dominate. For smaller, newer insurers such as National Interstate, finding underserved niches can be a great way to become very competitive and underwrite very profitably.
National Interstate's primary niche is covering transportation outfits such as trucking companies and charter-bus operators, though the company also conducts business on the consumer side by focusing on RVs and boats. It does underwrite traditional insurance policies in which customers pay premiums and National Interstate insures the risk, but an even larger part of its business is helping customers set up captive insurance programs. Captives are basically insurance pools that customers themselves set up and maintain, and although the customers shoulder their own risks, they get to pocket a portion of the profits if losses are kept low.
The huge jump for National Interstate comes as a nice respite for shareholders who had watched the stock slide by more than 30% since its third-quarter earnings announcement. Last Tuesday, the company announced that it expects earnings per share for the fourth quarter and full year to come in above Wall Street's estimates. The midpoint of the company's full-year EPS estimate would translate to 14% growth over 2005, and it would give the stock a 14.7 trailing P/E multiple. Even following the 23% gain and a further 7% that it tacked on in the days following the announcement, the stock is still trading below the peak of $29 that it hit right before the Q3 report was announced.
Zooming past the 21st century
In an interesting takeover reaction, shares of auto insurer 21st Century Insurance flew past the $19.75 bid that American International Group
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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 does not own shares of any of the companies mentioned. The Fool's disclosure policy is always statistically sound.
