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 Adventures in Hollyhood. 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" -- 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 Network Appliance, New York & Co., and United Natural Foods 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 when I looked at stocks that made five-sigma moves in the past, they didn't always move in a predictable fashion following the event. In other words, not all of the stocks that jumped way up turned back down, nor did all of the stocks that fell through the floor start to bounce back up.

The key is to figure out whether the big move was triggered by a legitimate change in the company's fortunes, or simply investor overreaction. To get a better idea of which of these stocks might be worth a deeper look, I got some help from The Motley Fool's new CAPS investing community.

That wily Kirk
For most people, life at 90 years old is much different than it was at, say, 50. The ol' joints are pretty creaky, you forget where you put the TV remote a little quicker, and you're busy trying to enjoy the retired life. That's why it's all the more amazing that Kirk Kerkorian, the maestro behind Tracinda, who's just a couple weeks shy of his 90th birthday, is doing what he's doing.

Last week, Tracinda, which is named after Kirk's daughters Tracy and Linda, announced that it has entered into negotiations with MGM to acquire the Bellagio and CityCenter properties. While splitting off those properties from the company might be hard enough, Tracinda's roughly 56% ownership of MGM further complicates the matter. This creates an obvious conflict between Kerkorian and the myriad minority shareholders, but it also has sparked hopes that an outside party might make a play for the rest of the company.

So why would Kerkorian want to make such a move? To start with, Bellagio and CityCenter are arguably the two most attractive assets in MGM's portfolio. Both are also a good fit with the changing face of Vegas, as it shifts from simply a gambling Mecca to a destination for gaming, entertainment, shopping, and luxury accommodations.

If he pulls it off, the purchase would put Kerkorian in a similar position to Las Vegas legend Steve Wynn, who cashed out from Mirage Resorts by selling to MGM Grand in 2000. Wynn has since parlayed his experience and financial resources into Wynn Resorts (NASDAQ:WYNN), owner of Wynn Las Vegas, which may very well be the hot hotel on the Strip today.

That's not to say that Kerkorian would plunder all of MGM's crown jewels. After divesting those two pieces, MGM would still keep some quality properties, including Mandalay Bay, MGM Grand, and Luxor, in addition to its joint ventures in Atlantic City's Borgata (with Boyd Gaming (NYSE:BYD)) and MGM Grand Macau.

I'm not one to speculate on the basis of a potential takeover bid, but the interest that MGM garnered on CAPS prior to Tracinda's move caught my eye. CAPS All-Star SheckyGreenGame had this to say:

I live in Las Vegas, and MGM controls by far the most popular and best-run properties on the Strip. CityCenter is already being built and will strive to parallel the Time Warner Center in NYC. MGM is so essential to gaming culture that Bellagio poker chips are accepted worldwide in place of a Federal Reserve Note (seriously).

Bmickeyaz adds:

[Harrah's] may have a better rewards program, but you can bet MGM is going to catch up -- they still have the best stable of properties in Vegas and CityCenter will be the next revolution in revenue in the US market -- Singapore loss hurt them, but Macau will be a strong play.

So far, 198 CAPS players have chimed in on MGM, and there's always room for more. Take a stroll on over to CAPS and let the community know what you think of the opportunity at MGM. And while you're at it, check out some of the other five-sigma stocks mentioned above -- or a few of the other 4,500 stocks on CAPS.

More CAPS Foolishness:

• Catch up on the Blog Buzz.
• 5 Dynamic Dividend Stocks
• 6 Foreign Values With Star Power
• 7 Surprising 1-Star Stocks

New York & Co. is a Motley Fool Hidden Gems pick.

Fool contributor Matt Koppenheffer enjoys his weekly statistical rendezvous even more than he likes watching Computer and Big Triece mix it up on Hollyhood. He does not own shares of any of the companies mentioned. The Fool's disclosure policy likes to play pai gow because there are a whole lot of pushes.