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 Monster House and Die Hard -- 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 be exactly comparable to renting a movie or buying a book, 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 has certain trigonometric functions that actually drove a mathematics Nobel Prize winner insane while designing it -- 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 American Express.

Give AmEx some credit
From the list this week, American Express and US Bancorp are both top holdings for Berkshire Hathaway (NYSE:BRK-A). While this alone certainly doesn't mean they're great investments, the fact that they passed the rigorous investment criteria of Warren Buffett says a great deal about both companies.

American Express, in particular, has been a long-running Berkshire investment. The company is well-run, it has a great credit card franchise, and over a long period of time, it has consistently earned returns far exceeding its cost of funds. According to Capital IQ, going back as far as 1992, AmEx has generated an average return on equity of 21.7% -- suggesting that there's some serious special sauce in the business.

In the world of credit cards, Capital One (NYSE:COF) hasn't been looking so good to investors recently, while MasterCard (NYSE:MA) has been on a tear. Investors are already getting excited about the potential initial public offering of Visa. But what about AmEx? Well, its stock hasn't done much of anything over the past year, while its business continues to chug along.

TheGarcipian, a CAPS All-Star and one of the 887 AmEx bulls on CAPS, had this to say about the company over the summer:

A well-run and well-managed financial company, AXP has performed well over the years and should continue to do so. It has its fingers in many pies, but not so many that its hand will be smacked very hard in economically difficult times. ... [It] should continue to beat out the S&P 500 year-in and year-out. Thumbs up for the long haul!

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 ...

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