A couple months ago, I wrote an article about the fat tail distribution of the stock market, and how it can mean huge, statistically improbable moves for stocks. In a follow-up article, I went on to talk about how we as investors should view those moves. Today, I'm back at it again, in an ongoing effort to bring to light the companies making these "5-sigma" moves.
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. 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 XM Satellite Radio, Cogent Communications, and BioCryst Pharmaceuticals 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 (or vice versa). It's crucial to understand the circumstances of the move, and to figure out whether it's indicative of fundamental weakness in the business, or if it's just short-term trading dynamics. In some of the historical cases 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 Corp. |
1/9/07 |
(21.8%) |
13.4 |
|
Compania Anonima Nacional Telefonos de Venezuela |
1/9/07 |
(27.6%) |
11.3 |
|
Hornbeck Offshore Services |
1/11/07 |
(22.0%) |
11.2 |
|
Placer Sierra Bancshares |
1/10/07 |
15.6% |
10.2 |
|
Lear Corp. |
1/11/07 |
14.5% |
7.5 |
The iron fist
It was a really rough week for Compania Anonima Nacional Telefonos de Venezuela (CANTV) shareholders last week. Before investors could even clean up the celebratory beer cans from stock's 64% run in 2006, the sticky hands of Venezuela's anti-capitalist President, Hugo Chavez, made an appearance. Last Monday, Chavez announced that he would be nationalizing CANTV, in which Verizon
On the news, shares plummeted 14% -- a move of 5.4 sigmas -- before trading was halted prior to the close of the trading day. When the stock resumed trading the following day, it dove more than 40% before recovering, finishing the day down just 28%. Wednesday of last week saw the stock making another five-plus sigma move, rebounding almost 15%. More recently, the stock gave back almost 10% of that recovery.
According to Venezuelan officials, the government does plan to negotiate the price for the buyout, a statement that spurred the slight recovery in the stock. This also means that the one-third that was shaved off CANTV's market cap isn't exactly a punishment for Chavez, since he'll decide just how much of his oil wealth to part with for control of CANTV. Verizon's stake in CANTV could be a boon for shareholders when negotiations begin, but the potential for the price to be determined more by the whim of Chavez than the company's fundamentals makes this a scary stock to be holding right now.
Mills' malls misfortune
Mills Corp., a REIT primarily focused on retail centers, showed last week how easy it is to create a 10-sigma drop in the stock, simply by mentioning the possibility of seeking bankruptcy protection. Early last week, the board of directors announced that it had completed an investigation into accounting issues at the company, and that the resulting adjustments could knock as much as one-fourth off the shareholders' equity. In conjunction with that statement, the company also mentioned that it could end up declaring bankruptcy if it's not able to meet certain debt obligations towards the end of the first quarter.
Though the stock of this heavily indebted company had already slid 70% since its high back in mid-2005, investors found another 22% to shave off on this announcement. The doom and gloom hasn't held up, though, as offers from the company's two largest shareholders to help arrange financing sent shares rocketing back up 17% in trading yesterday; the stock is up another 25% today. Investors obviously see a good deal of value in the company's real estate portfolio, but set against its $4.9 billion in debt and the "possible misconduct" associated with the accounting investigation, Mills may be a textbook "special situation" investment.
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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.
