Market Research - June 6, 2018
NBA Bluechips & Blue Chip Stocks
What do LeBron James and Kohl’s have in common? Steph Curry and Sherwin-Williams? Kevin Durant and PayPal?
In the spirit of the NBA finals, we used our platform to conduct a performance-based comparison of the Cleveland Cavaliers and Golden State Warriors players against the component companies of the S&P 500.
The results are not endorsements of any security or team — but they are fun and interesting.
First, to lay out our process and assumptions made: We used YCharts to conduct our analysis of the S&P 500 and Basketball-Reference.com to analyze NBA players, focusing on those currently playing in the NBA Finals. We then created two portfolios, appropriately named CLE and GSW, and compared them using the our YCharts Excel Add-In and proprietary portfolio comparison.
We analyzed 485 NBA players for whom Basketball-Reference had comprehensive data and who played in at least one game in the 2017–18 season. We also analyzed all 505 components (some companies have two share classes) of the S&P 500. For both data sets, we found the average of the six key statistics we would be evaluating, scored each player/stock against the league/index average, then equivocated and weighted those statistics to arrive at a composite score for each player and each stock.
We equated a player’s total points for the season to a stock’s price return and gave these statistics a weight of 30% — arguably the most important performance metrics for their respective applications — thus our equating them and weighting them highest. Another basketball stat, field goal %, was deemed equal to earnings per share (EPS) since both measure efficiency. You can see the other comparisons we made detailed in the table below. We’ll save you a verbose explanation of each decision, but if you know basketball and/or stocks, you can follow the logic.
As a note, NBA averages are for the duration of the 2017–18 regular season and S&P 500 averages are for the trailing twelve months (TTM), with the exception of EPS, which is the most recent actual reported EPS.
We arrived at a final composite score for each player and stock. If a player received a score of 0.65, this means they outperformed the average NBA player by 65%. The same goes for a stock, a score of 1.15 means that the stock performed 115% better than the S&P 500 average.
The most-average S&P 500 component was Cognizant Tech Solutions (CTSH) with a score of (0.001). The most-average NBA player this season was Mario Chalmers of the Memphis Grizzlies scoring 0.000. But in this context, being average isn’t as bad as it sounds. Cognizant Tech Solutions’ TTM price return was 13% and Mario Chalmers had 197 assists this season — that’s nothing to scoff at.
We suppose that’s better than being Luis Montero, a Detroit Pistons shooting guard who played just two games, scored zero points, had zero assists, and committed two turnovers — (0.699). At the other end of the spectrum is LeBron James with a composite score of 1.734 — he scored 2,251 points this season, had a 54.2% field goal percentage, and played all 82 games.
We then determined that a certain NBA player was most like a certain S&P component based on if their composite scores were equal or nearly equal.
For example, Kevin Durant. He scored 1,792 points during the 2017–18 regular season while the average player scored 533.64 points. So for this stat, “the Durantula” was 236% better than the league average. Combine that with 214% more assists than average, a FG% 15.4% above average, a games played ratio that was 29.7% above average, 201% fewer turnovers than average, and 34.3% fewer personal fouls than average, weight all six stats as described above, and Kevin Durant gets a 0.985 and performed better than 98.5% of NBA players — that makes sense for the 9x All-Star, former NBA Champ, and last year’s Finals MVP.
Our analysis determined that Kevin Durant performed in the 2017–18 regular season, relative to the NBA, most like PayPal Holdings (PYPL) performed over the last year relative to the S&P 500. PayPal’s price returns, 57%, was 430% above the S&P’s average of 10.79%. PayPal didn’t pay dividends, 100% worse than average. Their last reported EPS was 58.1% below average, analyst coverage was 126% above average, their ratio of shares sold by insiders, as a percentage of shares outstanding, was 80.7% better than average, and short interest was 10.5% worse than average. Weight all these stats and… PayPal Holdings’ composite score is 0.985; they performed better than 98.5% of S&P 500 components.
Cavs vs. Warriors
We decided to highlight this analysis for 10 players on each of the two Finals teams, the Cavs and Warriors — those 10 whom we could reasonably see getting meaningful minutes during the Finals series. Of note, the Warriors’ Andre Iguodala is currently sitting out the Finals with an injury. Depending on how long the series goes — and it’s not looking good for Cleveland right now — he could make an appearance, so we included Iggy.
The analysis brings to light some interesting facts about both the NBA Finals and the S&P 500 components.
First, the Finals implications. The Warriors have four players who perform 60% better than the NBA average (they’re also all All-Stars), the Cavs only have one — LeBron. As we’ve seen thus far in the Finals, LeBron is scoring the lion’s share of his team’s points, accounting for 80 of the Cavs’ total 217 points through two games. LeBron matched up with Kohl’s (KSS) — 74% TTM price return and 3.3% TTM dividends yield. Just as LeBron is carrying the Cavaliers, Kohl’s is carrying department store retailers.
We should also note that someone like Steph Curry is probably undervalued by our analysis — he missed a sizeable chunk of the season due to injury — but basketball fans nonetheless expect Steph to shine in this Finals series, as he did in dramatic fashion in Game Two. Curry matches up well with his stock comparison Sherwin-Williams (SHW), as both are extremely efficient. This season the Warriors’ point guard had a 49.5% field goal percentage while the (ironically) Cleveland-based paints company last reported EPS at $15.07.
You might remember that Sherwin-Williams announced its acquisition of former rival and stalwart Valspar in March of 2016 — if you bought SHW at that point, you’d be up nearly 40% today. Just four months later in July of 2016, Kevin Durant announced he’d be joining the Warriors. We won’t give all the credit for that acquisition to Steph, but it’s certainly a parallel.
Portfolio Comparison: CLE vs. GSW
Now that we know which players are most like which stocks, let’s build the portfolios and see who performs better as a team. We’ll weight the 10 holdings in each portfolio by each player’s salary as a percentage of their team’s total payroll. That weighting system results in the following:
*In April of this season, Golden State signed Quinn Cook to a 2-year contract which will take effect beginning with the 2018–19 season.
With the holdings and weights of the CLE and GSW determined, we performed a 10-year lookback on the portfolios and compared. The below is taken from the YCharts Model Portfolio Comparison template. While the data used in our analysis for both the NBA players and S&P 500 components does not go back to 2015, let alone 2008, it’s interesting that the two portfolios are fairly even until May 2015 — a month before these teams first met in the NBA Finals.
The Warriors and Cavs have met in the Finals in each of the last 4 years, with Golden State topping Cleveland in 2015 and 2017, and the Cavs squeaking out a 7-game Finals victory in 2016. Funnily, the CLE portfolio was most level with the GSW portfolio in the summer of 2016.
We’re looking forward to seeing how the rest of the Finals plays out. Golden State has pulled ahead to an early 2–0 lead in the series, but it heads to Cleveland for Game 3 tonight. Will Lebron’s out-of-this-world performance be enough to lift CLE back to even with GSW? Will the stacked Warriors continue their dominance? Will Kohl’s start accepting PayPal for in-store sales?