Stocks of the Week

Tips -- as any good investor knows -- are best left for waiters. Ideas, however, are the lifeblood of any dedicated stock picker.

So where do ideas come from? Well, besides the stock-idea fairy, they come from a variety of sources such as stock screens and financial news sites. You can also add The Motley Fool's CAPS service to the list. Among the many great features on CAPS is the Stock of the Day -- which serves up a new stock idea to CAPS players on a daily basis.

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 is then run. It churns out highly rated stocks for each player based largely on their prior selections and the phase of the moon.

Here are the five recommendations the CAPS supercomputer spit out for me last week:

Day

Stock

Market Capitalization

CAPS Rating (out of 5)

Monday

National Atlantic Holdings (NASDAQ:NAHC)

$65.4 million

***

Tuesday

Verenex Energy

$432.0 million

****

Wednesday

State Auto Financial (NASDAQ:STFC)

$1.1 billion

****

Thursday

Whiting Petroleum (NYSE:WLL)

$2.4 billion

****

Friday

Transocean (NYSE:RIG)

$36.6 billion

*****

Data from Motley Fool CAPS and Yahoo! Finance as of 11/9/07. Verenex market cap calculated from 11/10/07 U.S. stock price and number of diluted common shares outstanding as of 6/30/07.

As smart as the CAPS Stock of the Day algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions. With that in mind, I thought I'd kick you off with some thoughts on these ideas.

National Atlantic
As we saw in Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) recently completed quarter, the insurance environment is softening. This is going to make it tough on all insurers, but smaller insurers can often really feel the squeeze in these conditions. While there are things to like about National Atlantic -- including its conservative investment portfolio -- the company's reliance on lowering loss ratios to overcome rising expense ratios over the past few years is a bit worrisome. The unprofitable third quarter it just announced doesn't make me feel any more sanguine.

State Auto
CAPS players have been drawn in by the low price for State Auto, but it is in a very similar situation, as it has been feeling the pinch from lower prices and more competition. State Auto's third quarter was still well in the black, but the GAAP-basis combined ratio crept up to 98% during the quarter compared to 91% the prior year. However, State Auto is a much larger insurer and has proved its mettle over a long history as a publicly held insurer.

Transocean
It certainly doesn't hurt this driller that the price of oil has been on a seemingly unstoppable upward charge. And now that its merger with GlobalSantaFe (NYSE: GSF  ) has been approved, it's set to take on an even larger share of the contract drilling market. There are more than 1,700 players on CAPS who think Transocean will outperform the S&P 500, including one of CAPS' top players, tuffsledding, who says, "I expect rapid growth to continue because of the need to drill ever deeper offshore wells to tap available oil."

But now for the real question: Are you getting your own CAPS Stock of the Day selections? 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 do it ...

More CAPS Foolishness:


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