Stocks of the Week

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The idea of supplying customers with recommendations based on prior shopping habits isn't all that new. If you've signed on for service with Blockbuster or Netflix, you know about the movie recommendations they hook you up with (mine right now include Lethal Weapon and La Femme Nikita -- does that say something about me?).

Investing in stocks may not be comparable to renting a movie, but with thousands of stocks out there, finding new ideas can be overwhelming. To help grease the ol' mental machinery, The Motley Fool's CAPS service recently started providing players with daily stock recommendations.

It works like this: CAPS members create a portfolio by rating some of their favorite (and least favorite) stocks. The super-secret stock-of-the-day algorithm -- which I've heard uses pi to the 1,745th decimal in the calculations -- is then run. It then starts churning out highly rated stocks for each player based largely on their prior selections and the phase of the moon.

To give you a sample of the ideas CAPS is doling out, here are the five recommendations the CAPS supercomputer spit out for me last week:

Day	Stock	Market Cap	CAPS Rating
Monday	Zimmer Holdings (NYSE: ZMH)	$19.2 billion	****
Tuesday	Panhandle Oil and Gas (AMEX: PHX)	$208 million	****
Wednesday	Copart (Nasdaq: CPRT)	$3.0 billion	****
Thursday	Compton Petroleum (NYSE: CMZ)	$1.2 billion	*****
Friday	Safety Insurance Group (Nasdaq: SAFT)	$586 million	****

Data provided from Motley Fool CAPS and Yahoo! Finance as of Sept. 28.

As smart as the CAPS Stock of the Day algorithm is, it's still just an algorithm, so be sure to look before you leap onto any of its suggestions. With that in mind, I'll share some thoughts on Safety Insurance Group.

That tricky P&C market
Safety Insurance Group is a property and casualty insurer working primarily in the Massachusetts auto insurance market. Over the years the company has grown at a relatively steady pace, and the stock currently trades at a very enticing 5.8 times its trailing earnings per share.

Even as P/E ratios fall into the low single digits, there has been a big question mark over the P&C insurance industry. The market tends to be cyclical as pricing is alternately "hard," allowing insurers to set higher prices and remain very profitable, and "soft," forcing insurers to cut prices or risk losing customers to other insurers that will. Over the past few years, there has been a relatively hard market, and it has been a boon for the insurers. Now, however, a softening market is showing up in the results of many P&C insurers.

Although a soft market can be painful in the short term, insurers that have the wherewithal and foresight to not fall into a pricing war -- which typically leads to many insurers under-pricing risk -- will be the ones that stay solvent and are able to reap the benefits when the market hardens up again.

A number of players on CAPS have noted potential risks on the horizon for Safety if there are changes in the heavily regulated Massachusetts auto insurance market. Those concerns, though, seem to be overwhelmingly outweighed by the stock's low price. Back in early August, one CAPS player, lgrommetl, noted that Safety's margins were staying strong, and the stock carried a low PEG ratio. He also noted, "[The stock is] almost below book value now, and management has signaled a stock buy back; so they think the price is a sale too."

Now for the real question: Are you making your own CAPS Stock of the Day selections yet? If not, what are you waiting for? CAPS is free, and getting your Stock of the Day picks is much more fun than having me get California's Governator to track you down and give you a wedgie. And don't think I won't ...

More CAPS Foolishness:

• 5 Dynamic Dividend Stocks
• 7 Surprising 1-Star Stocks
• 7 Top Stock Blogs