When team managers are looking for talent, they're weighing the price of a particular free agent against the potential boon he could be to the team's championship aims. Of course, there are other things they consider, like how much time he's expected to spend on the injury list. And then there's the harsh reality that some good, but inconsistent players get sent back down or set free.In this period of market pessimism, investors have taken many solid companies to the wood shed. In the case of really well-run companies, this is an overreaction that will eventually correct itself. The value of solid companies will reassert itself in time. Subscribers who follow my deep-in-the-money newsletter, Nails on the Numbers, will be rewarded when the market corrects. My system has a win record of 99-1. In-the-money calls work to our advantage because of the leverage they provide. They give us exposure to a stock with significantly less money at risk vs. a cash or margin purchase for that same stock. Unlike buying a stock with cash, your risk on a call position is limited to the cost to buy the option. And be warned: Buying on margin is a dangerous game that I strongly urge you to avoid. I generally make my deep-in-the-money picks six to 14 months out from their expiration. If the stock price moves against me, my picks have time to recover. When the stock does move up, as I expect, my in-the-money call is in prime position for a win. I make a profit by specifying a good-till-cancel sell order above the option's purchase price, which takes the guess work out of when to cash out.
All it takes is one or two bounces, or spikes, in the stock to make that profit. The key to my strategy is picking the right companies. I pick value stocks by looking closely at debt, profitability and cash flow, moving averages and return. All these factors set the stage for a higher stock price in the future. To get a sense of what I see as a good company, let's look at a few of my recent picks, including some that haven't made it onto my scorecard -- yet. That has happened when specific option premiums rise too high, making them bad investments. I'm cautious about the price I pay for an option, so that once my picks make it onto my scorecard, we're getting them at a rational price. Last week, I picked pharmaceuticals maker Gilead Sciences ( GILD). On Monday, Gilead led the pack of BusinessWeek's list of the top 50 "best performers." Since I picked it, shares of Gilead briefly climbed 5.7% past their March 24 price. Other recent picks also made the best performers list, including my repeat pick Microsoft ( MSFT), which has won $4,000 for me over the past year. My March 9 pick, Occidental Petroleum ( OXY), is also on the top 50 list. It's one of several oil industry stocks I like, including my March 2 pick, Cameron International ( CAM), and Halliburton ( HAL), which I picked March 18. HAL has paid my system $10,100 over the past year. Some of my hidden gems are Freeport-McMoRan ( FCX), whose stock has jumped some 58% since I picked it Feb. 4. And Deere ( DE) has climbed 21% since I picked it Feb. 25.