The Dynasty Investor: An Intro to Value

Photo: USA Today Sports

How do you Dynasty? I look at playing Dynasty like one would look at playing the stock market. I have a portfolio of investments (players) and look to maximize the value of those investments. The ultimate goal is to perform better than the market and achieve superior returns. We will discuss this process in monthly articles for the Footballguys called The Dynasty Investor.

Trends come and go, strategies vary, and we always have to be looking to adapt to stay ahead of the curve, but one strategy that has held through time is value. There are lots of ways to think about value in fantasy football. You could be talking about getting a player in a fantasy draft much later than expected. You could be talking about trading for a player but not having to pay as much as you were thinking. You could be talking about specific player values like Wins Over Replacement Player (WORP) or value-based drafting like using the FBG Draft Dominator. The word "value" could mean something different to everyone, given your frame of reference. The way I look at it, value is about paying less for something than it is fundamentally worth.

Re-introducing a new way to look at value in fantasy football

The P/E ratio. Yeah, that same ratio used to value public companies; we will use those principles to value players in fantasy football. The P/E ratio or Price-to-Earnings ratio takes a company's price per share and divides it by its earnings per share. Once you have a company's P/E ratio, you can compare it to a similar company, and the one with the lower P/E ratio is the one with better value. Applying the P/E ratio to fantasy football translates into how much you have to pay for a share of a player relative to how much that player earns in terms of fantasy points.

I've found that the best way to look at a player's price is by using a real-time updating sentiment indicator like KeepTradeCut.com (KTC). KTC is a website that uses crowdsourcing, asking the people visiting the site whether they would keep, trade, or cut certain players. Then they put those results into an algorithm to develop values for players that they use for rankings and trade calculators. KTC uses the term value for the players, but I'm looking at those values as the players' price or cost to acquire them. Value and price are not the same things, price is the cost you must pay to acquire a player, but value is what that player is fundamentally worth. So KTC is what I'm using as a player's price per share and the numerator in my P/E ratio.

The denominator is a player's earnings or fantasy points per game (FPPG). So putting it together, a player's P/E ratio is his KTC price divided by his FPPG and then divided by 10 to make the numbers more usable. Then you use that ratio to compare similar players, and the one with the lower P/E has more value, or you get more FPPG for every unit of KTC you have to pay to acquire him.

A short example, Justin Jefferson vs. Ja'Marr Chase:

• Justin Jefferson's KTC is currently 9365, and he scored 21.5 FPPG in 2022. That would make his 2022 P/E: 9365 / 21.5 / 10 = ~44x
• Ja'Marr Chase's KTC is currently 8176, and he scored 20.5 FPPG in 2022. That would make his 2022 P/E: 8176 / 20.5 / 10 = ~40x

So right now, because he has a lower P/E, Chase is a better value. That doesn't mean that Chase is better than Jefferson; it just means that you don't have to pay as much KTC for their respective production on the field.

Comparable Analysis

The process of using comparable analysis is one in which you use a ratio like the P/E ratio to compare similar players to determine value. The key word is comparable. This only works if you are looking at similar players from an age, production, and potential perspective. It makes a lot of sense to compare Justin Jefferson to Ja'Marr Chase, but it makes little sense to compare Justin Jefferson to Mike Evans. Evans and Jefferson are at two completely different points in their careers from an age/production/potential perspective and sport different valuations. The main point here is to make sure you are comparing like-for-like players.

The next step in the comparative analysis is that if you have players of similar age/production/potential, they should be valued similarly in the market. I'm not saying you should pay the same price for them, but they should trade at similar P/E ratios over time. If they aren't, then an arbitrage opportunity exists to create value.

For example, if you take the example above between Jefferson and Chase, if you average their P/Es, you get a P/E ratio of ~42x. Then you reverse out of the P/E equation using the new Jefferson/Chase P/E and devise a price target for Jefferson of 8970 (42 * 21.5 * 10, with rounding). Jefferson is trading at 9365, his fundamental price target using this comparative analysis is 8970, representing a 4% downside from current levels. There must be more downside to warrant action, but it is an exciting way to think about value. Using the same process, Chase ends up with a price target of 8553, representing a 5% upside from current levels.

Price Targets

I mentioned price targets above, but it's important to note that I'm calculating price targets or a fundamental value for each player. Here is an example of what that looks like using a cluster of WRs aged 29 and older and scoring an FPPG of 20+.

The above are not rankings but rather clusters sorted by KeepTradeCut.com.

Remember these are not rankings, the players are separated into comparable groups called clusters, and the clusters are used in congruence with the P/E ratios to come up with upside and downside for each player. The most significant variables to consider are what cluster a player falls into and what FPPG you use in the P/E calculation (2022 actual, 2023 expected, your projections, etc.). In this example, you can see we are using an average group P/E of 25x to come up with price targets for the group, and it looks like Tyreek Hill might be slightly overvalued while Cooper Kupp might be undervalued.

Ratings

So once we have price targets, some players will look overvalued, some undervalued, and some fairly valued. Then I comb through those guys that look over/undervalued and decide if I have strong convictions. I'll put a buy or sell rating on the player if there is firm conviction. Buy means that the player's KTC price should appreciate more than the market. And a sell implies that a player's KTC should depreciate more than the market. Everyone else is a hold or market performer. If a player gets a buy rating, that means I'm out in the market actively trying to acquire that player at cost (KTC price). For a portfolio of fantasy football assets, I want to have more shares of him. And vice versa for a sell rating, where I'm actively searching to trade that player away at cost (KTC price).

Compounding

Although I'm not advocating a strong buy or sell on either Jefferson or Chase, it might make sense if you have some Jefferson shares to convert to Chase shares plus more. The point here is Jefferson/Chase are of similar age, production levels, and potential, yet Chase trades a bit cheaper on a P/E basis, so you could take advantage of that and collect extra. The "collecting extra" part or "plus more" is a concept I like to call compounding. Just like with interest-bearing accounts, where you put money into an account, then you earn interest, and the following month you earn interest on the original principal plus the interest you earned in the prior month, earning money on money. When you trade down the price curve for a cheaper player on a P/E basis without giving up too much production, age, or potential and collect more, you can use that 'more' to create more fantasy wealth.

Track Record

So does this whole process work? Well, I'm glad you let me ask. Here is my track record on public/published recommendations. These are all the trades I have closed over time. There are still open trades, but these are the ones that I have realized, i.e., it's only a profit or loss once you close the transaction.

Total Value Added = 16,460