Stocks of the Week

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 The Year of the Yao and About Schmidt -- does that say something about me?). Shoppers on Amazon.com get a similar slew of suggestions based on their previous purchases.

Investing in stocks may not exactly be comparable to renting movies or buying a book on Amazon, but with thousands of stocks out there, finding new ideas can often 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 has to be run on a Cray supercomputer and uses pi to the 104th decimal place, then starts churning out highly rated stocks for each player based largely on their prior selections.

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

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'll take a quick dive into my five selections from last week.

Schlumberger
As retailers of gasoline on street corners around America, Exxon Mobil and Valero are obvious beneficiaries of rising oil prices. Also benefiting in a big way, though, are the legions of oilfield-services companies like Schlumberger.

After a relatively rough go of it from the end of the '90s to early in this decade, Schlumberger has taken off. In 2004, net income more than tripled; it gained another 80% in 2005, and nearly 70% more in 2006. The stock followed suit and has just about quadrupled since its lows in 2003.

While there are a few Fools who think the oil cycle will come full circle, the vast majority still see high oil prices ahead and more gains for Schlumberger.

Southern Copper
Another stock that has been bolstered in recent years by strong commodity prices, Southern Copper, now has a strong following. Along with the 1,869% that the stock has gained since late 2001, it has the added bonus of a fat 6.7% dividend payout.

CAPS player JMB21 calculated back in December that the stock was 50% undervalued. It now seems like a very prescient call, since it's up more than 50% since then. JMB21 also noted Southern Copper's "huge margins [and] nice cash flow."

Of course, a nod to Southern Copper, or competitors like Freeport-McMoRan (NYSE:FCX), is a bet on copper prices staying at their current high perch.

MSC Industrial Direct
Slow and steady is said to win the race, but accelerating growth can't hurt either. MSC has seen its top-line growth go from 6.4% in 2003 to more than 30% for the past 12 months. The company has managed to expand its operating margin from 9.8% to 18% in that same period -- so is it any wonder that the stock has more than quadrupled since its lows in late 2002?

CAPS player vinney11 did a great job summing it all up: "This company is the 'go to' place for MRO (maintenance stuff for factories). They've got anything that anyone anywhere would ever want to fix what's busted. And if you are a competitor, be prepared to be acquired!"

Pengrowth Energy Trust
Adding one more commodity-related stock to the bundle, Pengrowth is a Canadian trust that acquires and operates interests in oil and natural-gas properties. The trust continues to chug along, but the stock has been hurt recently by the Canadian tax ruling regarding how payouts from trusts would be treated. For now, Pengrowth still offers a killer 15.4% dividend, but it's questionable whether that will continue.

CAPS player glammers has noted that the Canadian government is coming under considerable pressure following this tax change, but even if the change sticks, "you still have an energy trust with 10 year provable reserves that is paying 15% interest."

Texas Roadhouse
Though closely held by its founder, Kent Taylor, for its first decade of existence, Texas Roadhouse made its way to the capital markets in 2004. Though comparable restaurant sales have softened a bit, the company has continued to show strong revenue growth and has held margins steady since its debut. Meanwhile, the stock, compared to some of the other picks above, has been relatively tame, gaining 32% since the IPO.

CAPS All-Star GonzoMenduni calls Texas Roadhouse a potential "category killer" and says that while restaurant stocks are "never cheap on a P/E basis," it could be "a great growth story for the next 5-10 [years]."

While all of the above piqued my interest to some extent, I'm apt to agree with GonzoMenduni and say that Texas Roadhouse looks like it could be an interesting longer-term growth story. Inexpensive it is not, but as noted, restaurant stocks often aren't (I do have my limits!).

So what's your hold-up? Get on CAPS if you aren't already, and get your own stock of the day.

Fool on!

• The Best Small Cap for 2007: Texas Roadhouse
• Southern Copper: A High-Grade Mining Play
• Schlumberger Picks Up Speed

Fool contributor Matt Koppenheffer wouldn't turn down a nice, juicy Texas Roadhouse steak right about now. He does not own shares of any of the companies mentioned. Netflix and Amazon.com are Motley Fool Stock Advisor picks. In the '80s, the Fool's disclosure policy let Quiet Riot's metal health drive it mad. It has since recovered and sticks mostly to lower-octane pop-rock these days.