Brett Matthew and Zach James, Lead strategists for BetKarma’s inaugural NFL model sportfolios
Labor Day Weekend has come and went, boys. Sadly, it’s the unofficial end of summer, but with it comes the official start of the NFL regular season. Ditch the Chubbies swim trunks and frat star tank tops, and bid farewell to family, non-sports betting friends, and irritant girlfriends – it’s time to dig in, have some fun, and make some cash this fall. Make no mistake, it won’t come easy, but nothing worth having ever does. Let’s get to work…
Back in early August, before the preseason kicked off, we memorialized our preliminary NFL market views, with the obvious disclaimer that a lot could happen between then and now (e.g., injuries, holdouts, roster moves, depth chart upheavals, performance-related upgrades/downgrades – oh, and retirements). More than a few Colts bulls got burned with the unpredictable announcement of Andrew Luck’s sudden departure, and are stuck holding a negative EV over 9.5 wins ticket in their pocket (current market price between 7 and 7.5 wins). Ouch. For these reasons, we were disinclined to have too much conviction in our preliminary market views and model projections. However, we did make and recommend one futures position in August: the Ravens under 8.5 wins – and, despite the team going undefeated in the preseason, we continue to hold strong conviction in this position.
Before we look into our current market views and model projections, let’s assess how the prices on teams in the futures market have shifted from before training camp to early September.
We can see that the most notable price change came from, understandably, the Colts, with their expected winning percentage dipping 12.5%, from above 59% in August to under 47% in September. Most other teams’ price moves were relatively muted (which is expected). The market got slightly more bullish on the Bengals and Panthers (certainly contrary to public perception), and slightly more bearish on the Browns and Redskins.
Now let’s take a look at our updated NFL market views, represented by the spread between our model’s proprietary win total expectations and the futures market’s win total expectations. We use this spread as a proxy to discern where we believe teams’ expected performance is dislocated from reality – allowing us to capitalize on the market’s mispricing of a teams’ projected winning percentage.
Reviewing our model projections…
Our most contrasting views with the futures market is with respect to the Ravens, Buccaneers, Vikings, Titans, Redskins, and Colts, with all teams’ expected win percentages separated by approximately 10% or more. In other words, our projections and the market’s projections are separated by approximately 1.6 games or more. A juicy spread that presents wide opportunity.
Who are we selling?
Our model is more bearish than the market on the Ravens, Vikings, Titans, and Redskins, and to a slightly lesser extent, the Panthers. The market has priced the Ravens at 8.5 wins, Vikings at 9 wins, Titans at 8 wins, Redskins at 6 wins, and the Panthers at 8 wins. Our model implies 50/50 odds of the Ravens winning approximately 6.5 games, Vikings winning approximately 7.5 games, Titans winning approximately 6.5 games, Redskins winning approximately 4.5 games, and the Panthers winning 7 games. The most conviction by far is with respect to our Ravens projection, and the least conviction is with respect to our Panthers projection.
Of course, with all of our model-based projections, we, as managers of the model sportfolios, reserve the right to override the pure quantitative output and apply a qualitative, human-based overlay at our discretion to smooth out the projection, and to take into consideration intangible factors that the model cannot easily detect. In this case, we are not going to bet the Vikings or Panthers under, despite our model hating these teams. We have, however, implemented the following ‘under’ trades:
3.3% on Ravens under 8.5 wins to yield 3%
Lamar Jackson didn’t play much in the preseason, but showed flashes of why so many in the betting market are high on the Ravens this year. Perhaps most notably, renowned quant and strategist Warren Sharp has been pounding the table on Lamar Jacksons’ upside and arguing that the bears’ criticisms are misplaced. We are pleased that there continues to be buyers in the market for this team generally and for Lamar Jackson specifically – this creates a sizable opportunity to exploit and express our bearish viewpoint.
As we mentioned in our preseason note, Lamar Jackson had a string of relatively impressive games at the end of the 2018 season, elevating the stock on both him individually and the team collectively – but we shouldn’t forget that these saucy performances were against some of the most decrepit run defenses in the league (29th Bengals, 30th Raiders, 25th Falcons, 27th Chiefs, 24th Bucs, and 28th Browns). Frankly, Ravens fans could not have purposefully scripted a more generous handful of games for Jackson to outperform. These artificially impressive performances created unwarranted positive market perceptions.
By the second time the Chargers saw Jackson, he looked lost in the pocket and was completely ineffectual. We believe that the Ravens gimmicky and run-heavy offense will require significant re-thinking once it’s clear that defenses have adjusted to the scheme and to Jackson’s strengths. Unlike last year, Jackson will not be supported by a stout defense that allows the Ravens offense to slow the game down. On defense, the Ravens lost key contributors Terrell Suggs, Za’Darius Smith, C.J. Mosley and Eric Weddle. While the defense looked ferocious in the preseason, we are not convinced this performance is meaningful.
A final provocative thought on the Ravens: could Trace McSorely be to Lamar Jackson what Kirk Cousins was to Robert Griffin III? We actually don’t think this is too outlandish…
1.4% on Titans under 8 wins to yield 1%
Even without Andrew Luck, the Titans are still in a formidable division, where they will be lucky to get splits amongst the Colts, Jaguars, and Texans. Marcus Mariota is who we always thought he was and Coach Mike Vrabel’s overhyped defense will get a reality check in 2019, joining the bottom 10 of the NFL. This one won’t be easy, as our model projects the Titans will have 7 wins going into the last two games of the season, but we expect the Saints and Texans will take care of business, cashing this ticket and making the betting market wonder if Marcus Mariota is done in Tennessee (if he evens make it through the season with Ryan Tannehill breathing down his neck) and if Mike Vrabel is actually suited to be an NFL head coach.
2.8% on Redskins under 6 wins to yield 2%
Despite the juice being heavy on the under, we still find existing value for the taking by fading the dysfunctional Redskins franchise. The only way we can reasonably project the over hits is if the entire NFC East division implodes. The ‘Skins’ first 4 out of 5 games are against Eagles, Cowboys, Bears, and Patriots, and should be 1-4 heading into what is sure to be proclaimed the Toilet Bowl vs. the hapless (and perhaps winless) Miami Dolphins. Bold prediction? The 1-4 Redskins lose to the lowly Dolphins on the road, Dwayne Haskins is thrown the the wolves, and Jay Gruden gets the boot. We expect this team to appear to give up on the season, with C-list athletes playing for contracts, and maybe pick up three more wins, before finishing the season 0-4 against the Packers, Eagles, Giants, and Cowboys for a 4-12 season and the second pick in the 2020 NFL draft. They may squeak out one more win, and at worst a second – which would only then negate, but not lose, our position.
Who are we buying?
Our model is more bullish than the market on the Buccaneers, Colts, Steelers, Forty-Niners, and Chiefs The market has priced the Buccaneers at 6 wins, Colts at 7.5 wins, Steelers at 9.5, Forty-Niners at 8 wins, and Chiefs at 10.5 wins. Our model implies 50/50 odds of the Buccaneers winning approximately 8 games, Colts winning approximately 9 games, Steelers winning approximately 11 games, Forty-Niners winning approximately 9.5 games, and Chiefs winning approximately 11.5 games. The most conviction is with respect to our Buccaneers projection, and the least conviction is with respect to our Chiefs projection.
Again, we are not inclined to blindly bet the model’s advice, and in many instances will supplement the model’s projections with fundamental analysis. Consequently, we are not going to bet the Buccaneers, Colts, Steelers, or Forty-Niners over, despite our model finding significant value v. the market on these teams. We have considerable internal disagreement on the perceived upside of the Bucs and Niners, which makes any bet on these teams a non-starter, and there is simply too much uncertainty with the Colts and Steelers. Our model finds some relative value on the Browns, but not enough to unilaterally issue a buy signal. However, when read in conjunction with our fundamental research, we do find a sufficient amount of compelling value to consider a position. As such, we have implemented the following ‘over’ trades:
2.4% on Chiefs over 10.5 wins to yield 2%
We believe Pat Mahomes is a generational athlete. Granted, that isn’t too provocative of statement, and betting the Chiefs over may, on the surface, be one of the squarest positions in our sportfolios. However, we believe Mahomes has the trademark quality of a true superstar: he makes the players around him better. Over the course of the offseason as we dug into the tape and advanced metrics, we have become increasing bullish on the Chiefs. Such a high number doesn’t give us much wiggle room, and, admittedly, their schedule is downright unfair (ostensibly the 5th toughest, but that’s actually a conservative estimate). The worst teams on their schedule (non-playoff teams in 2018) are going to be fundamentally better teams in 2019 (Packers, Lions, Raiders). The Chiefs then have to close the season @ Patriots, @ Bears, and v Chargers in their final 3/4 games. Indeed, many bettors have found it fashionable to fade the Chiefs because “their offense can’t possibly be that good again.” Sure, but Pat Mahomes doesn’t need to throw 50 TDs again for the Chiefs to win 11, 12, or 13 games. The offense may not be as explosive again, but the defense can’t possibly be as implosive again (hello Frank Clark).
1% on the Browns over 9 wins to yield 1.1%
Closing thoughts…
In total, we are allocating 10.9% of our capital to the futures sleeve of our sportfolio, with a potential max return of 9.1%. We would typically not be comfortable with this risk/return profile. However, we are confident that the level of mispricing in the futures market warrants a less attractive ratio as appropriate. All futures trades will be allocated to our Moderate sportfolio, with the exception of the Ravens position, which will also be allocated to our Conservative sportfolio. No futures trades will be allocated to our Aggressive sportfolio, since having max liquidity is most important to that specific strategy.
