Days like Monday -- when markets dropped nearly 4% -- don't bring wins in my deep-in-the-money options-trading system, which has a record of 99-1. But plunging prices help us fill our positions.And that's exactly what happened yesterday. We landed our position in my pick Archer-Daniels-Midland ( ADM), which on Friday had looked possibly beyond our reach, at the price I specified. My subscribers often take wins on open positions on the market's up days. Some big-movement days last week brought quick wins of $1,000 apiece on Microsoft ( MSFT) and Hewlett-Packard ( HPQ) -- proving that good tech companies at value prices can pay off for us. We also scored a $3,900 payoff on our position in Cisco ( CSCO) on March 23, after 103 days in play. Over recent weeks, we've laid the groundwork for comparing a company's return on capital to its cost. When picking stocks, I want to know if the company puts its capital to good use. I determine this by comparing its ROC to its cost of capital. On March 17, I reviewed how to determine a company's cost of its debt -- one of two components in the cost of capital. We did that by seeing how much the company pays its bondholders. In this case, I determined that Halliburton ( HAL) had an estimated after-tax cost of 2.6% on its $2.6 billion in long-term debt at the end of 2008. I also showed that long-term debt made up 13.8% of total capital. Our next step is to multiply these two percentages, giving us a weighted cost of debt of .00359. But that number is meaningful only in the context of Halliburton's total capital. Equity made up the other 86.2%.
On March 24, we came up with an estimate of Halliburton's cost of equity at 0.0977. Now, multiplying that by 86.2%, we get its weighted cost of equity of 8.42%. If we add together the weighted cost of equity and cost of debt, we get a weighted average cost of capital, or WACC, of 8.78%. Some buy-side analysts evaluate stocks' historical performance by comparing their WACC to their return on capital. When a company's cost of capital exceeds its ROC, the stock risks getting downgraded, which can punish the share price. Basically, we're looking at whether a company's profit is higher than the capital cost to generate that profit. If a baseball team hires a star player at a cost of $10 million a year more than an average player, that may boost the home team's reputation and potential. But it will be worth it financially only if that star helps bring in more than $10 million in revenue beyond what the average Joe would bring. Now, let's compare Halliburton's numbers: In 2008, HAL's return on total long-term capital was 17.57%. That amounts to an 879 basis-point improvement over the company's cost of capital of 8.78%, indicating a pretty good use of its debt and equity. For comparison, the oil and gas industry had a ROC of 18.3% for 2008. But not all oil services stocks have such a rosy return on capital. Some, such as Global Industries ( GLBL) and Complete Production Services ( CPX), reported net losses -- and negative return on capital -- in December.