What a year in sports (so far!) 2016 is turning out to be: The Alabama – Clemson college football championship game. Peyton Manning winning the Superbowl in his last game as a professional player. The Cleveland Cavaliers coming back from a 3-1 deficit to beat the Golden State Warriors in the NBA championship. Olympic-dominating gold medal performances from Usain Bolt, Katie Ledecky, Michael Phelps and Simone Biles.
And the 2016 Cleveland Indians!
Despite coming so close to winning the World Series this year, the Tribe’s performance was absolutely thrilling from our perspective. Though there are so many great story lines from the team’s performance, the one story we — as investors — like to focus on is the pitching performance. Growing up a Tribe fan all our lives, pitching has been the one consistent weak spot for the team. Not this year. Benno Martens at Wahoo's on First calls the Tribe's postseason pitching performance "historic" and made the following observation through Game 5 of the World Series:
Consider the following: without the club’s second and third starters, Carlos Carrasco and Danny Salazar, Cleveland’s rotation has yielded just 11 earned runs in 59 innings pitched, good for a 1.68 earned run average. Staff ace Corey Kluber has gone 4-1 with a 0.89 ERA in 30.1 innings of work, going on short rest twice…That ERA for Kluber is the second-best in postseason history for any pitcher with a minimum of 30 innings. The right-hander also has 35 strikeouts to just eight walks, which equates to a healthy 10.38 strikeouts per nine innings, and puts him in a tie with Orel Hershiser for the most in one postseason in franchise history. The Indians as a staff have struck out at least eight batters in their last 13 playoff games, which is the longest streak in Major League Baseball history. In addition to Kluber, Miller has broken the MLB record for punchouts by a reliever in a single postseason, with 29 in his 17 innings of relief. As good as the Tribe’s pitching has been throughout the postseason, it has ramped up to a different level in the World Series. Through 36 innings, the team has a 1.50 ERA against the third-highest scoring team in all of baseball in 2016.
While that is pretty darn impressive, this will blow your mind: the combined salaries of the Cleveland Indians had the sixth lowest-paid pitching staff out of all 30 Major League Baseball teams! (By the way, the Chicago Cubs pitching staff was the second highest and was paid over three times more than the Tribe’s staff!).
This concept is similar to our investment approach. Being value investors, we are always trying to buy $1 worth of value for $0.50 — whether it is the common stock of publicly traded companies we purchase, such as Cisco Systems Inc.; or the aggregate earnings stream of a geographic region, such as emerging markets, in the form of an Exchange Traded Fund (ETF) or mutual fund. When you buy something for $0.50 that you think is undervalued and has an intrinsic value of $1, you can establish a “margin of safety” that may protect against a negative change in the investment thesis, which ultimately impacts the intrinsic value. It also works to protect against market downturns as undervalued assets tend to go down less, according to Bloomberg.
Now only if there were a vehicle through which we could invest in Kluber and company … clearly the intrinsic value there is much, much higher than the market value! Way to go Tribe!!!
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