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Friday, July 11, 2008

Growth and Value

There are two general camps of investing in the world of stocks: growth and value. Growth stocks are ones where you pay a (significant) premium to what the stock is currently worth on its balance sheet because the company is expected to grow revenue and profits at an inordinately high rate, making the purchase price justified over a certain period of time. Value stocks are ones which have been beaten down and can be purchased at a discount to accepted norms of the balance sheet, ie low price/earnings ratio, low discount to "book" value etc.. Why the mention of these financial investment terms on a football blog? Simple- drafting is all about selections based on a philosophy of growth and value. To quote Wonder, it is not WHO you take but WHERE you take him. Therein lies the denominator which ultimately determines the aggressiveness of a draft choice. Initial Public Offerings ("IPOs") are always about growth, because often these younger companies have more growth prospects than balance sheet track record and stability. In 1986 Microsoft went public and was one of the greatest examples of a successful growth stock, always outperforming what was seemingly a rich stock price. For every successful growth pick, there are many less-heralded companies that fade into oblivion. Think Dot-com high fliers that went from triple digits to zero. They never made a penny in earnings and eventually they cratered. In the football world, paying up for 'growth' means using a very high draft pick for someone who has skills but not necessarily the track record of performance 'yet' on the field. Johnnie Lam Jones was the ultimate draft growth pick disaster. The Giants have recently made two growth picks (coincidentally both in the second round): Osi Umenyiora and Sinorice Moss. At the time, picking Umenyiora was a reach, but the Giants felt that his 'raw' talents would lead to great success down the road. They were correct. (And well before this blog was started, I was on record as not being happy... here was a guy who barely knew what football was who was short on experience being taken in the SECOND round! Not value by ANY stretch.) But obvly the 'promise' of Sinorice Moss, who was given a pedigree because of his brother, has yet to deliver the same rewards. Such is the life of a growth pick. The latest examples of classic value picking is Justin Tuck and Ahmad Bradshaw. Tuck fell to the third round because of an injury. Bradshaw fell to the 7th round because of "off the field" criminal activity. Bradshaw was a classic bear market where his valuation eventually becomes so compelling that you expend less resources on the promise of performance returning down the road. Great value because of WHERE he was chosen.


Bass said...

I have a scientific background, not a financial background, but that does make sense. I suppose when the "dot.com" phase was huge these stocks were considered growth stocks.

Obviously, using this analogy, Eli would be considered a growth stock. Towards the end of the book the GM, Accorsi tells Eli, after the Eagles playoff loss, "....you're going to win a championship". This was not you may possibly win a championship someday, but YOU'RE GOING TO WIN A CHAMPIONSHIP.

If Accorsi truly knew and believed this, you can argue virtually any price was worth paying, because this is not about stocks and bonds (where you may worry about losing money in the long run if you don't select wisely and the ultimate goal is basically to make as much money as possible overall, not to make a nice splash with one stock in one year). In the NFL, as Andy F. has said previously, it is about winning championships. If you draft a quarterback that is guaranteed to win a title (barring catastrophic injury, etc.), then it is difficult to overpay in that situation.

Anyway, it seems that the Packers have a very difficult dilemma. If you take Andy F.'s philosophy literally, and you are the Packers, then you could say that Brett Favre should be your QB again this coming year as it could be strongly argued that Favre gives your best chance to win a championship this year.

However, I agree with what the Packers seem to be doing. Aaron Rodgers has the chance to be very good. I don't think Brett Favre has a good excuse why they lost the playoff game againist the Giants. He had so many oppotunities including two McQuarters fumbles, two Tynes misses, and then winning the coin toss in OT, but still managing to lose the game. Plus, the team has supposedly started to gear the OTAs towards Rodgers' strengths.

Even if sticking with Rodgers doesn't give them the best chance to win in 2008, it does give them the best chance for "the future" (even though that is a more abstract notion than next year).

Perhaps the Packers are just saying that Brett Favre is still a Packer in order to try to get some "value" in a deal with another team, instead of allowing other teams to think they will be able to get him for nothing.

I wonder if Andy F. has an opinion in terms of what he would do if he were the Packers GM and/or coach.

Andy F. said...

If you have a scientific background, then you will appreciate value so much more than growth. Value is precise because the process is much more objective and analytical. Growth is subjective because you are forming an OPINION about the future that has not yet arrived. Value discounts the future so there is far less guesswork and sentiment. Read "Value Investing Today" by Charles Brandes, a primer on value investing techniques, and you will be hooked.

Yes, almost all QBs taken are 'growth' stocks. Brady in round 6 was obvly 'value.'

It is not correct to say that virtually any price is worth paying if you "know" a player is going to win you a championship. This is a 45 player game, and if you block out the sun with too much of your cap going to this player while simultaneously losing all of those draft choices, it will hamstring the rest of the team that you are supposed to be surrounding this guy with.

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