The Next 5 Stocks to Buy?

They sound like gangsters from the 1930s, but Dutch and Mary Rose are shallow-water oil fields off the coast of Louisiana. Their discoveries by Contango Oil & Gas (AMEX:MCF) marked one of the largest finds in the past 25 years for such a mature area.

The company, which is half-owner of the field, quickly started looking for a buyer. After it sold off its Fayetteville shale acreage and its LNG regasification terminal in Freeport, Texas, to XTO Energy (NYSE:XTO) earlier this year, the Dutch and Mary Rose prospects were the last remaining assets owned by Contango. If it finds a buyer, Contango wants to spin off the company as Contango Energy, which will retain undeveloped assets. That would give shareholders an opportunity to profit from further discoveries, though even management doubts they'll be able to be as lucky as they were with Dutch and Mary Rose.

In April, Contango hired Merrill Lynch (NYSE:MER) to begin the process of selling the company, and two weeks ago announced that it was in the process of talking to potential buyers. What sounds like a large, sprawling operation -- exploration and production of oil -- is actually a very small business, just six employees; management owns nearly a quarter of the company's stock.

Screening for likeability
Contango showed up on a screen of companies that have enjoyed growing investor support these days, after starting off the year on the outs. Contango jumped from a two-star Motley Fool CAPS rating in January to the top five-star rating today, while also enjoying a valuation below that of the market average.

CAPS is a 110,000-member investor community that rates thousands of stocks on whether they will outperform or underperform the market. While it's not a predictive service, its first year of operation showed that the trailing returns of the stocks in the CAPS universe correlated precisely with their relative CAPS ranking. Top-rated four- and five- star stocks outperformed low-rated one- and two-star stocks.

Here are a few of the other companies the CAPS screener found that are currently enjoying significant investor support:

Source: Motley Fool CAPS; Morningstar.
*For next fiscal year.

Naturally, this is not a list of stocks to buy and sell -- just a starting point for further analysis. Investors have raised their outlook significantly on these companies, and it may mean that there's still room to move.

A fine mesh filter
Contango Oil & Gas is benefiting from surging demand for oil, and it has been hoping that a foreign player will see the value in its operations and use the still-weak dollar as an opportunity to buy in. For that reason, CAPS investor staticman010101 noted a few months ago that the buyout option made Contango an attractive opportunity:

CONTANGE OIL & GAS is a great oil and gas performer. This is definately a gem that is just now being noticed. The numbers are incredible. This company could very easily be an aquisition target for one of the majors or large independants.

Others, like top-rated CAPS investor plaidone, said they've invested real money into this exploration and production player because of the burgeoning market for oil:

No one seems to have a handle on why oil keeps going up. There aren't enough refineries in the US, the war, lack of supply, etc. I'm sure are all players, but with alternatives like hydrogen, biofuels, or even (did I really say this?) water power just around the corner, and the fact that OPEC says we aren't really in any danger of running out of supply, how exactly can you explain the price of over $120 per barrel when we were looking at less than $60 per barrel just over a year ago? Is it a bubble? I don't know, but one thing is certain--oil isn't going to be seriously challenged as a fuel supply overnight. So I'm putting some eggs in this basket since the return has been so good over the year. I'm only marking it as a 2-4 year outperform since I'm pretty sure aternative fuels are finally coming into their own and will be a practical alternative to oil in the next few years.

Takes a CAPS bow
There are many ways to screen for stocks to beat the market. You can use the new CAPS screener to find other stocks you're gonna want to own, but if you want to see what other stocks CAPS investors are marking up to four and five stars, head over to Motley Fool CAPS now -- it's completely free to join.