The start of the NBA season could not have come sooner. After a dramatic offseason, featuring geopolitical turmoil and broad free agency moves, the league can finally wipe the slate clean and start fresh with some new narratives—from the Rockets potentially imploding to Zion becoming the biggest bust ever. The truth is these questions will take time to answer, but perhaps, statistics and analytics can provide some insight sooner. With a basic multi-factor model, employed by many asset managers, we can identify players that exhibit (and don’t) persistent characteristics of future performance.
Let’s Review Our 5 Factors
Minimum Volatility: A strategy designed to deliver market-like exposure with below-market risks. This factor style serves conservative investors seeking exposure to assets with less significant drawdowns than the broader market. Some minimum volatility stocks include McDonald’s, Visa, and Coca-Cola.
Size: Captures excess returns of small-cap companies relative to large and mid-cap stocks. In most cases, small-cap stocks offer greater growth potential than more established companies.
Value: Value investing is about finding bargains—stocks that have underperformed without a significant drop in fundamentals. Using indicators like price-to-book and price-to-earnings will help distinguish underappreciated stocks from lemons. The current bull market has punished value in favor of momentum and growth.
Momentum: Stocks that have outperformed in the past tend to record greater returns going forward. A simple momentum strategy takes a long position in an asset that recently reached a new all-time or 52-week high.
Quality: Companies with strong fundamentals like low debt, high earnings growth, and stable corporate governance fall into quality. The iShares Edge MSCI USA Quality Factor ETF tracks return on equity, earnings variability, and debt to equity to determine quality investments.
Factor Starting Five
PG- Ricky Rubio (Value)- The Timberwolves drafted Ricky Rubio in 2009, in hopes that the young Spaniard possessed the vision and precision to become the next great floor general. But after a decade of games, the Suns point guard remains an unfinished product. A slew of injuries and a missing jump-shot made it difficult for Rubio to catch-up with the changing game. No one expects much from him now besides a handful of assists and double-digit points on a good night. Counted out like a beaten-down stock searching for a path to profitability. Rubio might surprise everyone on a young and peckish (not hungry yet) Suns team, which makes him a perfect value pick for the upcoming season.
SG- Danny Green (Min Vol): Consistency, consistency, consistency. The new Lakers shooting guard posted virtually the same stat line in 8 combined years with the Raptors and Spurs. Of course, like all players, Danny Green has hit rough patches over the years, but to expect his average production to tail off, would be a mistake. Given the rise in minimum volatility stocks, this comparison might seem unfounded. However, I liken the investment factor to a reliable veteran who can still light up the scoreboard in the right situation. Think of the recent increase in minimum volatility like Danny Green’s 2013 Finals spectacular performance against the Heat or the 28 point outburst in the season opener.
SF Giannis Antetokounmpo (Momentum): Even after winning the MVP last year, many still see Giannis as a work in progress (60% complete according to him). His jumper is shaky and playoff experience, somewhat limited. With a consistent mid-range jumper, not even a three-pointer, the Greek Freak would move from one of the best players to an unstoppable force. It may take a few seasons, but any progress is good. Investors look for many of the same characteristics in a momentum stock. That is high-growth companies with a sustainable strategy and plans to build out new verticals.
PF Jonathan Issac (Size): The pivotal third-year in the NBA determines whether players will eventually make an all-star game or sit at the end of the bench. Why? For many, the rookie extension window begins after year three, giving players who make a significant jump the option to sign a lucrative contract. So, of course, every third-year player wants to perform well, but some will inevitably fall flat. If you read any NBA preview, many picked Jonathan Issac as a prime candidate to break out. Much like drafting a future all-star, investing in small stocks can reap similar risks and rewards.
C – Rudy Gobert (Quality): The anchor of any defense is a center. And no player (okay maybe exaggerating here) has presented opposing offenses with more trouble than Rudy Gobert. The two-time defensive player of the year propelled the Jazz into an elite defensive team for the past three seasons. For investors, a quality stock might possess many of the same fundamental strengths as Gobert.
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