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 Pirates of the Caribbean and La Femme Nikita -- 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 a movie 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 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 current phase of the moon.

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 thought I'd kick you off with some thoughts on Ensco.

Oil's hired guns
Is anybody besides me sick of hearing about oil and oil prices? An AP headline on Friday read, "Oil Falls After Setting Another Record," and it's been some variation on that for a few days now, as oil has been alternatively flirting with and breaking $80 per barrel. In case you're just tuning in to oil prices, that's high.

Time-traveling back to Economics 101, you might recall that when the prices of goods or services rise, more suppliers of those goods or services enter the market hoping to capitalize on the high prices. In the case of oil, that means plenty of oil companies doing exploration and trying to find new sources of oil. If they can find oil, that's great. The problem, though, is when a company spends a lot of money searching for oil and comes up with bupkis.

The contract drilling sub-sector of the oil and gas industry has gotten significant attention over the past few years because of the group's ability to profit from the booming price in oil without having to track down the oil fields or worry about pumping and selling it afterwards. The drillers are the hired guns of the industry; they own the heavy artillery that's used for drilling for oil and are largely engaged on a "dayrate" basis by those companies that want to drill new wells. While drillers come in many different flavors, Ensco focuses on offshore drilling and currently owns a fleet of 50 rigs, including one deepwater submersible rig, with four more planned for construction through 2010.

As good as drilling might sound, there are certainly risks. Right now, drillers are in high demand and dayrates are high, which, like high oil prices and exploration, is bringing new competition into the market and driving drillers to increase capacity. Though it may seem like high oil prices are here to stay, oil prices have historically been cyclical, and should they fall, we could end up with a glut of drilling capacity. This might leave some drillers with big, expensive drilling equipment sitting around depreciating and gathering barnacles.

Of the 397 CAPS players who have logged their thoughts on Ensco, only 12 of them think the stock will underperform the market. JR10022, who rated Ensco an outperformer in late August, thinks high oil is here to stay:

This is a tough environment to invest in, but you just can't go wrong with oil drilling ... oil prices aren't going below 65-70 again anytime soon, and people don't use less energy in a recession.

Now for the real question: Are you getting 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 do it ...

More CAPS Foolishness:

• 5 Dynamic Dividend Stocks
• 7 Surprising 1-Star Stocks
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