The NFL post-season kicked off this past weekend, featuring twelve Wild Card teams fighting to advance to the Divisional Playoffs. Fans enjoyed many highly watchable games with a few highly surprising endings.
Investors will note a lot of similarities to the business world: competition is tough, rivalries are strong, the money and stakes are high. We’ll leave the commentary about the on-field performances to the football experts – what can the NFL playoffs teach us about investing in stocks?
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5 Investing Lessons from the NFL Playoffs
#1: Favorites Can Collapse Quickly
After nearly winning last year’s Super Bowl, the Philadelphia Eagles looked almost certain to return after victories in 10 of their first 11 games this season. Even the Wall Street Journal noticed the appeal, “star-studded roster, a charismatic young coach, and an unstoppable quarterback sneak play that drove the rest of the league nuts.” The Eagles had the highest odds of winning the Super Bowl (11:1) as late as November 21. But the team’s subsequent epic collapse, losing five of its last six regular season games and putting on a dismal Wild Card performance (losing 32-9), reminds investors that there is no such thing as a “sure thing.” Paying up for momentum and high expectations leaves little room for disappointment. The current payoff for that formerly “highest odds” gamble: a 100% loss. While current powerhouses like Apple (AAPL) and Tesla (TSLA) seem like sure winners, the momentum and high expectations for these stocks similarly leave little room for disappointment.
#2: Sometimes the Most Interesting Story Isn’t Worth an Investment
The Houston Texans looked dominant in their dismantling of the Cleveland Browns on Saturday. Led by one of the most exciting quarterback stories in the NFL today – rookie CJ Stroud, a two-time Heisman Trophy candidate from The Ohio State University who is setting all kinds of pro football records – the Texans could advance deep into the playoffs. But, their odds of winning the Super Bowl appear overpriced, at 34:1, given the daunting veteran powerhouses they now must face, starting with the Baltimore Ravens. Stroud is already performing at the level of other quarterback legends and could lead the Texans to greatness in future years. But, for this year, it’s probably best to watch, literally, from the sidelines.
#3: There Is Some Merit to Buying (and Smartly Selling) Cigar Butts
At the start of the season, the LA Rams had somewhat uninteresting odds (36:1) of winning the Super Bowl. With their dismal start to the season, their odds had slid to 226:1 by mid-November. In essence, the odds were pricing in a zero chance. Savvy fans, however, recognizing the possibility that this cigar-butt team (with its 4-6 record) might live up to its capabilities after its win over the Seattle Seahawks, could have made an equally savvy wager. The Rams went on to win six of their last seven games, sending their Super Bowl odds to 49:1. The Rams lost in the Wild Card round, but this cigar butt generated a massive return in the meantime. Frontier Group Holdings (ULCC) offers a similar cigar butt potential.
#4: Turnarounds Offer Impressive Potential
Following their victory in the season-opener against the reigning Super Bowl champion Kansas City Chiefs, the Detroit Lions looked like a turnaround in the making. And, it wasn’t just their stunning win, but the multi-year root-and-branch overhaul of their entire organization, including new leadership at the very top of the ownership structure. Their season-opening odds of winning the Super Bowl were 36:1 – but, critically, these odds improved sharply as the season progressed. Today, their payoff odds are 10:1. “Buying” underdogs with cheap valuations (low expectations) yet major changes underway, like Newell Brands (NWL) and Macy’s (M), can work wonders for stock investors’ returns.
#5: Sometimes Buying the Suppliers Is the Best Bet
Comcast (CMCSA) didn’t field a football team, but they came away with a win nonetheless. Their live-streaming of the Kansas City Chiefs-Miami Dolphins game set a record for the most-streamed event ever, with 23 million viewers. Comcast is well-managed, conservatively capitalized and holds a powerful position in providing high-speed internet service along with its valuable NBC Universal and other assets. And, its share valuation is an unchallenging 6.9x estimated 2024 EBITDA. Regardless of how the on-field play unfolds, Comcast is probably a winner.
As contrarian investing specialists, we focus on companies that have “the right stuff.” We do all the extensive idea searching and analysis to help you benefit from out-of-favor stocks. Our capabilities save you time while boosting your chances of profitable investing.
Best regards,
Bruce Kaser
Chief Analyst
Cabot Turnaround Letter and Cabot Value Investor
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