Risk, Twinkies, and fantasy football

Carbone-WilliamWith their inevitable return to shelves this July, Twinkies have staked a claim to a spot with death and taxes in the certainties of life. Their return brought smiles to the faces of many junk food aficionados and kept an American staple from extinction. But other than an overlapping fanbase, is there a connection between fantasy football and Twinkies?

First, let’s take a look at the highlight of the coming NFL season for many, as August is fantasy football drafting season. For the uninitiated, fantasy football is a game where players, or “owners,” attempt to build a team of real-life football players who will put up the best combined statistical performance. Each real-life player can only be selected by one “owner” during a fantasy football draft. One of the keys to winning this game is to select players that outperform their draft positions, akin to stocks outperforming their market expectations. Players returning from an injury are often available at a discounted price, creating an opportunity if the discounting is unwarranted.

The last two years have shown extreme examples of the results of targeting players with injury concerns. Last year, Adrian Peterson was attempting to return from anterior cruciate ligament (ACL) and medial collateral ligament (MCL) surgery just eight months after the injury occurred. After four years of being drafted as one of the top two fantasy football players, health questions caused Peterson to fall to an average draft position of 24th in 2012. For this discounted price, owners who selected Peterson were treated to the NFL Fantasy Player of the Year and, for many, a championship season.

On the other side of the coin, in 2011 Peyton Manning was attempting to recover from neck surgery and associated questions regarding his arm strength. Manning was being selected in the sixth round of fantasy drafts after years of being selected around the second round. This discount was too good to pass up for many, despite the questions around Manning’s health. For those who took the risk, they were soon informed that Manning would miss the season and provide the same return on their investment as they would have if they drafted a Twinkie. (Note that this is not the connection we are looking for.)

While we can see the risk and reward paradigm in play for fantasy sports, does the same hold true for real-world teams? One study from the Society of American Baseball Research Analytics Conference took a look at the costs of starting pitchers relative to the production they provided their team over the next season. The results indicated that during the 2011 season, starting pitchers on one-year contracts, typically at a salary discounted because of health questions, provided the best value among free agent signings. The higher value of these short-term deals is a recent phenomenon as the discounted prices for pitchers coming back from an injury is a recent development.

Now what does any of this have to do with Twinkies? After parent company Hostess filed for bankruptcy and officially shut down business operations, the snacks business of Hostess Brands was purchased by Apollo Global Management and Metropoulos & Co. Apollo, a private equity firm, specializes in purchasing distressed assets, while Metropoulos has focused on failing food brands. The team of Apollo and Metropoulos has brought Twinkies, along with other related snacks, back to supermarket shelves after some restructuring and marketing changes.

It’s unlikely these savvy investors kept the Hostess brand alive because of a feeling of nostalgia for the snack cakes, so they must have seen opportunities to improve the structure while capitalizing on the brand name and free publicity provided by the shutdown. According to management, a primary cause of the Hostess bankruptcy was the cost of using unionized workers, so the new business plan calls for the use of non-union workers who provide labor with lower pension and medical costs. The new structure also consolidates the production plants and utilizes a new distribution model which expands its market reach. They’ve also attempted to use the nostalgic feeling of its customers with the phrase “The Sweetest Comeback in the History of Ever,” while adjusting to more health-conscious consumers by cutting calories and looking into healthier options. The Apollo team saw the potential for great returns, so invested in the discounted opportunity Hostess presented.

Risk tolerance is clearly a personal (or organizational) trait. Higher risk can certainly beget higher rewards; it’s also possible to be risk-averse and still profitable. Both cases require some expertise in making effective use of the specific risk profile. While fantasy football owners don’t have the opportunity to restructure an injured player’s knee, they can still seek out the opportunity present in players with increased health risks. For the risk-averse, these players are not likely to be a part of your fantasy future. But for those looking for discounted prices (and increased uncertainty) in their upcoming fantasy football drafts, take a look at Robert Griffin III, Hakeem Nicks, and Rob Gronkowski. You may find yourself getting a high-quality product for half the price, or you may be wishing you spent your league’s entry fee on a new box of Twinkies.

One thought on “Risk, Twinkies, and fantasy football

  1. Will, you have taken an intellectual topic of risk tolerance and drew creative links for us using twinkies and fantasy football. I appreciated your clever approach.

Leave a Reply

Your email address will not be published. Required fields are marked *