The Brilliance of Deep-Value Investing: Michael Vick

Four years ago, Michael Vick was one of the highest paid and most recognizable players in professional football. A former No. 1 draft pick, he had dozens of corporations hitching their money and hopes to his rising star. Vick even graced the cover of Electronic Arts' (Nasdaq: ERTS  ) coveted Madden football game, and held lucrative endorsement contracts with big-name brands like Nike (NYSE: NKE  ) , Coca-Cola (NYSE: KO  ) , Kraft (NYSE: KFT  ) , and Hasbro (NYSE: HAS  ) .

Then, all at once, he became nothing. Persona non grata.

Unless you were on Mars, you know why this happened: his involvement in dog-fighting. But what you may not have considered is the brilliance of the team that resurrected Vick's career: the Philadelphia Eagles. More than once, I've watched the Eagles pick up assets on the cheap and milk the value out of them for as long as it makes sense to do so.

It's high time someone declared the Eagles the NFL's superior deep-value investors.

The Vick files
After pleading guilty to a number of federal charges in 2007, Vick spent a total of 21 months in prison, doing hard time for his heinous crime. He was justifiably booted out of the league, he lost his contract, and he lost his endorsements. Just how much was all of that worth? Before it all came tumbling down, Sports Illustrated estimated he was earning some $25 million per year in total.

In 2009, Vick was released from prison and conditionally reinstated into the NFL. I'm not sure anyone was surprised to see that no team wanted to take a risk on the convicted felon once he was up for grabs. Vick was like Fannie Mae or AIG during the crash -- he was simply not worth the risk or the trouble, a troubled asset in an extremely risk-averse market. But what so many people failed to understand then (and now) is that buying a stock (or athlete, in this case) is a function of both value and price.

Enter the Philadelphia Eagles.

The price/value equilibrium
Assuming they are rational, knowledgeable investors will take the absolute worst stock off your hands if you're willing to offer it up for next to nothing. Why wouldn't they? Heads they win huge, tails they don't really lose much at all. In this case, next-to-nothing is essentially what the Eagles paid to get Michael Vick on their team.

Last August, the Eagles signed Vick to a $1.6 million no-frills deal, with an option to pick up another year for $5.2 million. Though the money itself was a bit much to shell out for the standard backup quarterback, it certainly was not far from the typical rate. Plus, Vick was not the standard backup. Without much on the table from an economic standpoint, all the team was putting at risk was a roster spot, and perhaps its reputation. In the world of pro football, reputation doesn't appear to be worth all that much, so for all intents and purposes, the team wasn't putting a whole lot at stake.

Almost immediately, Vick's presence paid off. He generated furious buzz, bringing fans and protestors alike to the games. Stories about the Eagles went national. Vick's new Eagles jersey quickly became a top-seller. Instantly, the Eagles name went front and center. And though Vick went on to have a fairly unremarkable 2009-2010 season, he continued to generate significant publicity throughout the season, pulling his own weight in a bizarre, but ultimately useful way.

Essentially, the Eagles organization played a round of deep-value investing: high-potential returns with limited downside risk -- big upside, small downside. See it? Now, fast forward to the present.

Today's situation
Right now the football blogs are abuzz with rumors that Vick is off to another team, perhaps the Carolina Panthers or the St. Louis Rams -- whatever team it is will probably pay up for the opportunity. I don't know the specifics, but you can bet your bottom dollar a competitor will have to give the Eagles a whole lot more than $1.6 million worth of consideration. So, regardless of what gets paid to them, Philly has already won.

And they've either won a little, as I've already described, or they'll win a whole heck of a lot when the market begins to reprice the Vick name. At the minimum, the Eagles received a boatload of media attention above what they'd normally get, sold some more jerseys than they probably would have, and got some better-than-backup-caliber play from Vick as a bonus. Anything that happens from here is pure profit.

This isn't the first time the Eagles have done this. Ever heard of Terrell Owens? In 2004, Philly took a risk on "T.O.," a widely hated player who was being oversold by the market. That gamble paid off handsomely. While Owens eventually became quite a divisive force on the team, ultimately leaving for the Dallas Cowboys, he also made 14 touchdowns for the Eagles, helping the team on their phenomenal run all the way to the Super Bowl in 2005.

Now, as a born Redskins fan, it's tough for me to admit that the Eagles generally operate like I try to invest. They acquire a bunch of great long-term assets, complemented by a few high-risk, calculated bets.

The art of the high-risk maneuver
In both investing and pro sports, deep-value investing has its time and its place. It's probably not appropriate for all types of investors, and you definitely don't want to build an entire team (or a portfolio) around those types of assets. But when done effectively, deep-value investing can take a well-balanced portfolio and shoot its performance through the roof, without a whole lot of added risk -- just as I suspect it will for the Eagles.

The Foolish bottom line
In the markets, emotionally driven market dislocations like what happened with Michael Vick happen all the time. It happened with Johnson & Johnson (NYSE: JNJ  ) during the Tylenol scare in the '80s, and it's happening with Toyota (NYSE: TM  ) right now. The world of sports seems to follow a similar mold.

Those of us who don't own a professional team need to remember that investing is a function of both value and price. There's a right price for every investment, even the most hated ones, if you're willing to take the risk. Want more? This is precisely the type of investing that we're about to roll out in our new Motley Fool Special Opportunities service, where advisor Tom Jacobs will expose and unlock deep values in the market, and then use them to magnify his portfolio returns. If you dare to unleash the power of the price/value dynamic, enter your email address in the box below.

Fool Nick Kapur has nothing but the utmost contempt for a person who would mistreat any animal, especially a dog. He is not a fan of Michael Vick and would never let him play on his team. He owns shares of Electronic Arts and Hasbro. Coca-Cola is a Motley Fool Inside Value pick. Electronic Arts and Hasbro are Motley Fool Stock Advisor recommendations. Johnson & Johnson and Coca-Cola are Motley Fool Income Investorrecommendations. Motley Fool Options has recommended a buy calls position on Johnson & Johnson. The Fool owns shares of Hasbro and has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (28)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 03, 2010, at 7:48 PM, ChuckB166 wrote:

    I was expecting to see a few sentences on how the Redskins are the opposite of the “deep value” strategy when it comes to free agents after Nick mentioned he was a fan. Maybe the new management will operate more like the Eagles this year.

  • Report this Comment On March 03, 2010, at 8:56 PM, TMFShakespeare wrote:

    This is probably my favorite Fool article ever, but that may just be the Eagles fan in my talking.

    E-A-G-L-E-S EAGLES!!!

  • Report this Comment On March 03, 2010, at 8:59 PM, TMFShakespeare wrote:

    Ok, more serious comment, Nick, it must be infuriating to you as a Redskins fan, because as ChuckB166 points out they take the polar opposite of the Eagles deep value approach.

    Take for example, Jeremiah Trotter in 2005, who was overvalued and the Eagles knew it, so they let him test the market and he was picked up by Daniel Snyder's Redskins for roughly his asking price, which was way higher than he could deliver. Two disappointing seasons later, he was let go and then the Eagles picked him back up at a deep deep discount.

  • Report this Comment On March 03, 2010, at 9:18 PM, ElCid16 wrote:

    I think Vick is somewhere between Toyota and Fannie Mae...maybe Bank of America.

    Toyota's just going through a 4-game Merriman-esque PED violoation suspension. Fannie Mae, on the other hand, is Jamarcus Russel bad...

    Which begs the questions, where does Al Davis land?

  • Report this Comment On March 03, 2010, at 9:18 PM, ElCid16 wrote:

    question*

  • Report this Comment On March 04, 2010, at 12:10 AM, mikecart1 wrote:

    Michael Vick will end his career as one of the top 5 qb's to ever play the game. You heard it here first!

  • Report this Comment On March 04, 2010, at 9:04 AM, BMFPitt wrote:

    The Eagles paid something like 150k per time that Vick touched the football last year, and I can't think of a single memorable play he made.

    Even if he was worth the money for his performance, was he worth the giant headache he caused the franchise when they signed him?

  • Report this Comment On March 04, 2010, at 11:29 AM, BMFPitt wrote:

    There's a multi-year waiting list for season tickets in Philly. If anything, he simply took media attention away from other Eagles coverage in the local media.

    They'd be lucky to get a 5th or 6th round pick for him in a trade right now. Is that enough value for all the money and hassle?

  • Report this Comment On March 04, 2010, at 11:34 AM, sansbeanie wrote:

    Vick torched the Cowboys with a huge touchdown pass in their playoff game. That was the Eagles' best play of the game by far. McNabb couldn't do anything against the Cowboy's D.

  • Report this Comment On March 10, 2010, at 11:30 AM, TMFGreenwave wrote:

    I'm not sure if TO was really a deep-value play, more of a boom or bust type stock, like a small cap Pharma trying to get its drug through the approval process. Tremendous upside potential but also a chance of a near total loss.

    Remember the NFL had to step in and void TO's trade from the 49ers to the Ravens because he threw such a tantrum (in the process calling B-more's GM and HOFer Ozzie Newsome racist) and the Eagles not only gave up a player but also signed TO to a $49MM contract with $10MM guaranteed.

    Was it worth it? Probably for that one year they went to the Superbowl. Although when TO was lifting weights in his driveway as his agent shouts "no comment" a few months later, it becomes debatable.

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