What does a 38-year-old NFL quarterback have in common with an electric car company?
Two words: high expectations. I believe Denver Broncos quarterback Peyton Manning is the fantasy football equivalent of Tesla (TSLA) in the stock market.
As a big enthusiast of fantasy football, I’ve noticed some interesting parallels with successful investing.
For example, fantasy football is not about finding the “best” player, just like investing is not about finding the “best” company.
Investing is about finding the best company relative to expectations. Great opportunity comes from the gap between future probabilities and expectations. I believe the same principle applies to fantasy football.
Why Peyton Manning looks “overvalued”
No doubt, Peyton Manning is one of the best quarterbacks in NFL history. The question is whether you should pay his expensive price tag to add him to your fantasy football roster.
That $55 ties Manning for the highest value ever for a quarterback and is a full $12 more than the next quarterback this season. This may not come as a surprise since Manning passed for a record-setting 55 touchdowns and 5,477 yards last season. And he did have a very strong season opener against the Colts with 3 touchdown passes and nearly 270 passing yards.
However, I believe Manning’s numbers will cool this year, for three main reasons.
Below is chart of the nine times a quarterback has exceeded 40 touchdowns in a season.
Here you can see a very obvious regression after career seasons for these passers. Ignoring Tom Brady’s 2008 injury, a quarterback who throws for over 40 touchdowns throws 14 fewer touchdowns the following season. This includes a 21 touchdown drop for Manning himself from 2004 to 2005.
The most impressive part about Manning’s record season was that he accomplished it at the ripe old age of 37. The average age of the 40+ TD quarterbacks is 28 years old.
History tells us that Manning should be about a decade past his prime. It’s only a matter of time before age catches up to Manning. We don’t know when it will be, but I believe it’s best to view Manning in terms of risks and rewards, rather than a certainty to continue his record-setting pace.
3. The Vegas ‘smart money’
Fantasy football auction values for individual players are an indication of public perception. When a player like Manning has a high auction value, it means fantasy football fans are “bullish” on him.
However, I also like to see what the “smart money” in Las Vegas is saying. I think of Vegas as the sophisticated investors of the fantasy football world. It can be a good idea to see what the smart money is up to.
Currently, Vegas has Manning’s 2014 passing touchdown line at 40.5. Coincidentally, this is right in line with the historical 14 touchdown drop-off I mentioned earlier.
Why Peyton Manning is like Tesla
So how does all this relate to Tesla?
In a business sense, Tesla is coming off a record-setting year of its own. Start-up car companies are rare, and an all-electric car company like Tesla is unprecedented.
Tesla has executed in every way you could ask, growing revenues by 90% over the last four quarters. With that being said, I believe expectations have gone too far. I see very little upside if any for Tesla’s stock from here.
Even Tesla’s high-profile CEO Elon Musk is warning about the stock.
“I think our stock price is kind of high right now,” Musk said recently. “If you care about the long term, Tesla, I think the stock is a good price. If you look at the short term, it is less clear.”
Why Tesla looks “overvalued”
If Vegas is the smart money in football, I believe option traders are the smart money for investing. (Options contracts give investors the right, but not the obligation, to buy or sell securities at a specified future date.)
Watching how options trade can provide additional information about investors’ market expectations over various lengths of time. In fact, this is a tool I use to evaluate regular buy and sell decisions for the Leveraged Value portfolio.
Without getting too bogged down in investment jargon, the trading in put options for Tesla suggests that investors see risk in the stock. Meanwhile, Tesla shares are at an all-time high after rallying nearly 90% so far this year and almost 40% the past three months alone.
This divergence in opinion between the investing public and sophisticated options traders on Tesla, mirrors that of fantasy football owners and the Vegas odds makers on Peyton Manning.
In the wake of record-setting paces, it can make sense to check the smart money. I try to avoid euphoria and examine probabilities. That’s why I expect slower growth from Tesla and fewer touchdowns from Peyton Manning in the coming months.
May you have a great season both in your investment portfolio and on the football field!
DISCLAIMER: The investments discussed are held in client accounts as of August 31, 2014. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.