Investing & Maybe Fantasy Baseball

In investing there is something called a value trap. It’s an investment that appears to be very cheap because it is trading at low evaluation metrics like book value, earnings and so on. The investment looks too good to pass up but hidden within the numbers and analysis is further doom (like L Brands for example).

Travis Shaw signed a one-year $4 million-dollar deal with the Blue Jays and will likely be their everyday first baseman (and I presume will play some third base when Vladimir Guerrero Jr. takes a night off).

Last year Shaw’s average ADP in NFBC was 91.2 overall. Even if he repeated his good 2018 season fantasy owners were losing money/value at that ADP. (He was my 90^th hitter overall.) After looking at his brutal 2019 some fantasy owners may disregard that season and conclude he’s a value play for 2020.

The underlying statistics were so awful last year. The strikeout rate went from 18% to 33% and the contact rate went from 81% to 71%. FanSided says last year’s poor performance was all mental and the season spiraled out of control. I’ve never played baseball at any professional level, but it has to be difficult to see a .164 batting average on the big scoreboard in the middle July.

From my research Shaw didn’t have any injuries so it’s possible his issues were all mental and a blank slate will do wonders for him. However, let’s take a look at the percentage of whiffs per swing per BrooksBaseball. The whiff percentage increased nearly 12 percentage points against fastballs. That indicates A) he may have lost a tick of bat speed and was guessing at the plate, B) he lost more than a tick of bat speed or C) he abandoned his approach at the plate because of his early season struggles.

Whether Shaw is a value trap or not is dependent on where he goes in drafts. Since first base is so thin I can see many fantasy owners, when presented between Shaw versus Christian Walker/Michael Chavis/Renato Nunez, will take Shaw because he has more upside. The Brewers just signed Justin Smoak to play first base. Shaw could’ve played first base for them; the Brewers know more about Shaw than any other club and they decided to sign Smoak. Shaw can play third and second; his versatility is much more valuable than what Smoak brings. Despite all that the Brewers still decided to sign Smoak.

Unless I can get Shaw really cheap I’m not going to own him, which makes him a value trap.

All that said, what’s good about drafting Shaw is after about three weeks we should have a pretty good idea if 2019 was a fluke year or not — and that has value because if it wasn’t a fluke you can drop him and move on. If you draft Edwin Encarcion or Nelson Cruz you will have to wait until July before deciding whether to cut them or not.

Last year the Brewers won 89 games and were a couple of outs away from winning the Wild Card game. So far this offseason the biggest notable losses to their roster are Yasmani Grandal, Mike Moustakas, Jordan Lyles, Drew Pomeranz and Eric Thames.

Despite being a small market team, they’ve been buying undervalued assets/players. In the past week the Brewers have quietly made under the radar moves, at the position level, that could have a big impact on their ability to win in 2020: Eric Sogard, Justin Smoak and Avisaíl García. (They also traded for Omar Narváez who should be a really good offensive catcher.)

Based on what the top seven free agents have signed for the Market is valuing one WAR at about $5.4 million per one WAR (image below). Numbers are in millions and using WAR at FanGraphs.

Now let’s look at the three players the Brewers just signed:

In terms of WAR there is room for upside for both Sogard and Smoak. The Garcia signing looks like an overpay. Also, I don’t think there is any profit potential for Garcia on draft day which is why I’m not discussing him.

Sogard had a WAR of 2.6 last year, the best of his career at the age of 33. Most of his value came from offense. The biggest change was his hard-hit rate: 35.1%. Let’s put that number into context. There were 207 hitters with at least 400 plate appearances and Sogard is 166^th on the list or in other words the bottom 20%. Now, 35% hard-hit rate may be low, but it’s a vast improvement compared to his career beforehand. From 2011-17 his hard-hit rate was 19.7%.

Sogard has always been a high contract hitter; he’s always had contact rates 89% and higher. Last year his contact rate was 89.3% and that puts him at fourth among hitters last year. When you combine the contact rate and hard-hit rate it’s not surprising to see how well he hit last year. The Brewers are banking he can have a repeat season. I think he regresses a little, but I think he hits .277 with 16 home runs and 5-6 stolen bases. It’s too early to tell but I think Sogard leads off and if that happens, he could score 90-plus runs, which would make viable in 12-team mixed formats.

When I look at Smoak’s 2019 season I see someone who was extremely unlucky. He had the lowest BABIP of his career last year (.223) compared to .270 for his career before 2019. Last year he had the highest hard-hit rate of his career and his contact rates and strikeout rates look the same as prior years. I’m projecting a .245 batting average with 25 home runs. I am not a believer in Keston Hiura. I think he was extremely lucky last year and he’s one of my biggest regession candidates. If that happens it’s very possible Smoak hits cleanup, which, like Sogard, makes him a sneaky play in 12-team mixed leagues.

What’s the most interesting is they have too many players and not enough positions. This leads me to believe the Brewers are going to constantly rotate players in and out of the lineup (except for Christian Yelich and Hiura). With Lorenzo Cain and Ryan Braun it makes sense to give them more days off; to use overused clichés it should keep them fresh and most importantly, healthy to play a full season. The constant rotation of players means it’s going to be frustrating to own Brewers hitters, but it looks like the Brewers are A) creating one of the deepest benches in the National League and B) acquiring undervalued hitters with low financial risk.

Howard Marks is the cochairman and cofounder of Oaktree Capital Management. Mr. Marks is an exceptional investor. He has been compounding money at similar rates as Warren Buffet for 25-plus years. If you’ve read his books or his memos one of the common themes is the importance of more perceptive thinking or what he calls second level thinking. For example, if a stock goes from $10 to $60 in two months a first level thinker will say, “we should buy the stock.” However, a second level thinker will say, “the company is great but the price its selling at is too optimistic. We should sell.”

My initial reaction to the Corey Kluber was this was a bad trade for the Indians and great for the Rangers. Kluber was sent to the Rangers for Delino DeShields Jr. and Emmanuel Clase. DeShields is an above average defender in center field with no power but can have an OBP in the .340s and steal 25-plus bases. Clase is the classic young reliever who got promoted to the majors before the developmental was close to finishing because he has an elite fastball (this happened to Neftalí Feliz, who also started his career for the Rangers).

The Indians got a fringe starter at center field and a young reliever with an excellent fastball without the command of his secondary pitches. From 2014-18 Kluber was at least one of the top 10 best pitchers in baseball. The first level thoughts about the Indians return is light. However, I want to try to look deeper.

Other than 1-2 organizations I believe front offices are extremely intelligent and competent. In my opinion, the Indians and Rangers are well run organizations. Therefore, I assume there is no lack competency.

Let’s take a step back. When someone makes a trade with someone, especially in pro sports and in equities, it’s a very hubristic act. You’re telling the other person that the asset you’re receiving is worth more than the other person thinks.

When any trade is made it’s important to ask yourself, “what does the team know that I don’t know?” The dominant narrative is the Indians got a really light return. Obviously, the Indians do not believe that so why did they do the deal? These are the likely answers; also, it could be a combination of multiple of these:

1. Kluber will probably be not as good as 2014-18. In fact, he could only be a mediocre pitcher now. Kluber will make $17.5 million in 2020 and that is a lot for a small market team.
2. The Indians have a deep starting rotation without Kluber. They have Mike Clevinger, Shane Bieber and Carlos Carrasco at the top of the rotation. They also have Aaron Civale, who looked like a number three pitcher in spots and Zach Plesac who reminds me of Chase Anderson when he first made it the Majors. Not to mention Logan Allen who, if he can improve his command, could step into the rotation. From 1-6 the Indians have a top 10 rotation in baseball.
3. The Indians think DeShields and Clase are better than the current census. It’s possible, but their recent history of talent acquisition gives me pause. For example, they signed Yonder Alonso and let Carlos Santana They also traded for Jake Bauers in exchange for Yandy Diaz. That said, if you’re in an AL-only I think there is a 40-50% chance Clase has the most saves on the Indians in 2020 and if you draft Brad Hand you’ll want to handcuff him with Clase.
4. The deal with the Rangers was the best deal they could get. If you believe the return the Indians got was light that means the other 28 teams were offering less than the Rangers. If the other teams were offering less the question becomes, “what do the other 28 teams know that we don’t know?” I have to assume the Indians at least spoke to every team about Kluber and the Ranger deal was the best they could get.

All four factors factored into the decision to trade Kluber. The fourth point, in regards to Kluber’s 2020 fantasy value, is the most concerning. He makes a lot of money but I have to think if clubs, even small market ones like the Reds, Brewers, Braves, Twins and Padres, thought he could return to form they would have offered more for him. Therefore, I have to conclude we’re going to see a diminished version of Kluber. (The changing of ballparks means very little to me even if it is Texas and its new ballpark.)

As of December 16, these are the numbers I project for Kluber: 190 innings,  3.36 ERA, 190 strikeouts and a 1.11 WHIP. (I don’t project wins until early March.) Those numbers are still good but they’re no longer elite. He is my 17^th rated starting pitcher.