The Street experienced a nice bit of volatility last week, so I had my pick of the litter in compiling this week's list of 5-sigma movers. As the indices continue to push higher, most of the volatility is still sending stocks north, and as a result, more shareholders were popping corks than shedding tears for this group of movers.

Just to briefly rehash, a 5-sigma move happens when a stock has a one-day price adjustment 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, 5-sigma is more than just a look at the same ol' jittery stocks making the biggest absolute moves. So although Hansen Natural, InterContinental Exchange, and Expedia 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 originalarticles 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's indicative of fundamental weakness in the business or just a sign of 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 -- and similarly, some stocks managed to continue losing ground even after a huge one-day fall.

Here are a few of the 5-sigmas from the past week.

Stock

Date

Change

Sigmas

Gallaher Group (NYSE:GLH)

12/6/06

17.9%

11.8

Kyphon (NASDAQ:KYPH)

12/4/06

30.1%

10.7

Vanda Pharmaceuticals (NASDAQ:VNDA)

12/7/06

68.7%

9.6

Bank of New York (NYSE:BK)

12/4/06

12.0%

7.3

Pfizer (NYSE:PFE)

12/4/06

(10.6%)

7.3



Merging into 5-sigma
One of the themes of the week involves companies spiking on the news of a merger or acquisition. In just about all cases, when a company is acquired, the acquirer has to pay a premium over the current price to persuade shareholders to give up their stake in the company. As a result, when an acquisition is announced, the shares of the target usually enjoy a nice pop.

On the other side of the table, it's not nearly as common for the shares of the acquirer to experience a big upward move on news of an acquisition, because shareholders are often skeptical about the price their company paid or about whether the supposed synergies can actually come to fruition. Nevertheless, two of the stocks on the list this week moved on news of an acquisition -- Bank of New York, for its acquisition of Mellon Financial, and Kyphon, for snapping up privately held St. Francis Medical Technologies.

For Bank of New York and Mellon, investors are, well, banking on the combined might of a new company -- likely to go by the name "Bank of New York Mellon Corp." -- that would oversee $16.6 billion in combined assets and would be the world's top asset custodian. With $1.1 trillion in asset under management to boot, the company would also be one of the top 10 global asset managers. The combined company would benefit from Bank of New York's expertise in asset servicing and Mellon's in asset management.

While the companies do seem to make a nice fit, delivering on the promise will still take a good deal of work. The two hope to save up to $700 million per year in expenses and would like to do so as much as possible through attrition. In addition, management will have to integrate the two corporate cultures and make them work together as seamlessly as possible -- a task that Morgan Stanley, with its Dean Witter acquisition, could tell you isn't always cake. With a number of industry and demographic trends in its favor, the combined company will probably do quite well, but there's certainly no guarantee of a smooth ride early on.

The Kyphon acquisition of St. Francis is not nearly as large, yet it also got investors fired up. Kyphon, a company specializing in minimally invasive treatment of spinal injuries, expects to broaden its reach by taking over St. Francis' FDA-approved X STOP implant for treating certain spinal conditions. A significantly profitable company, Kyphon will be taking some non-cash charges in 2007 because of in-process R&D and acquired intangibles from the deal, but beyond these charges, the deal is expected to be accretive to Kyphon's earnings.

A tale of two drugs
The biopharma industry is notoriously volatile. What would it take for one of these companies to hit the 5-sigma level? Vanda Pharmaceuticals achieved the feat with flying colors last week, when it skyrocketed by 68.7% on some good data from its phase 3 trial for iloperidone, a drug for treating schizophrenia and bipolar disorder. Vanda is gunning to take a piece of the estimated $16 billion market for atypical antipsychotics with iloperidone. It noted in its IPO prospectus last April that the company has had indications from the FDA that if the current trials are successful, the data would be sufficient to file a new drug application with the FDA. The trials are expected to conclude in mid-2007, with the application process to follow in late '07.

The clinical results for iloperidone have shown statistically significant efficacy versus a placebo for both the study's primary and secondary endpoints, and they've also confirmed the safety of the drug. Though it sure ain't over till the fat lady sings, for a development-stage company such as Vanda, a marketable drug holds the promise of bringing real revenue to the company and helping it pay for the further development of other drugs in its pipeline. In the current M&A environment, significant progress could make Vanda a target for companies such as Pfizer or AstraZeneca (NYSE:AZN), which have atypical antipsychotics on the market.

In other, already very well-covered drug news, Pfizer pulled its potential blockbuster, torcetrapib, from testing after results came back showing a higher-than-expected mortality rate among patients taking the drug. Torcetrapib, which raises "good" cholesterol and lowers "bad" cholesterol, was expected to take the Lipitor throne as that blockbuster prepares to go off patent in 2010. Fellow Fool Michael P. Cecil, M.D., thinks the decline in Pfizer shares could give investors an opportunity similar to what happened when Merck (NYSE:MRK) recalled Vioxx. Meanwhile, Michael Leibert thinks that Pfizer's strong pipeline could help it rebound from its current slump.

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Pfizer is a Motley Fool Inside Value recommendation. Merck is a former Motley Fool Income Investor pick. Check out either newsletter service free for 30 days.

Fool contributor Matt Koppenheffer is happy with consistent returns, but he wouldn't mind seeing one of his stocks on the 5-sigma list to the upside. He does not own shares of any of the companies mentioned. The Fool's disclosure policy is always statistically sound.