This one is a purely speculative play. High risk, high reward.

Hercules Offshore

Are the riots and demonstrations in the Middle East frightening you? They should be if you care about your quality of life that is so dependent on Middle East oil. From an investing standpoint, the turmoil puts a spotlight on the sector and demonstrates once again why crude should be part of your portfolio.

With the increase in oil prices over the last decade, there are very few stocks trading for less than $5 to exploit. One possibility is Hercules Offshore ( HERO). The oil spill in the Gulf of Mexico last summer nearly killed this company.

Shares of Hercules fell to nearly $2 per share in the wake of the disaster, but the collapse was shortsighted. Eventually the oil spill in the Gulf was contained. Longer-term there simply is no choice but to drill offshore, spill risk or not.

Now, with oil crossing $100 per barrel, drilling in the Gulf is fait accompli. That bodes well for Hercules, a company on track to lose 55 cents per share in 2010 and expected to lose the same in 2011.

I think those numbers are a bit too pessimistic. I think a near-breakeven year in 2011 is possible, especially with oil prices where they are today. If anything, oil prices are going higher, irrespective of the turmoil in the Middle East. A growing economy is creating demand that simply outpaces supply.

Keep in mind that Hercules was a $35 stock during peak oil in mid-2008. Of course, that was before the stuff hit the fan. Long-term we are heading back to peak oil prices. I can see Hercules doubling as a result.

To see these stocks in action, check out the 5 Stocks Under $5 portfolio.


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At the time of publication, author had no positions in stocks mentioned.

Jamie Dlugosch is a founder and contributor to MainStreet Investor and MainStreet Accredited Investor. Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to The Rational Investor, The Prudent Speculator, Penny Stock Winners and InvestorPlace Media.

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