Contrarian investing is a stock market strategy where individual investors attempt to make above-average returns by betting against conventional wisdom.
It’s perhaps easiest explained with an example: Stock X has been downgraded by prominent analysts, causing a major drop in stock price. This drop off has started an avalanche of selling, depressing the stock price even further. In a short period of time, this behaviour drops the price of the stock below its actual value: the analyst was probably right to downgrade the stock, but the market has overcompensated and now the stock is undervalued by the majority. Our savvy contrarian investor can now swoop in and buy a stock for less than it is worth, and eventually reap large gains as the company’s performance improves and the stock price rebounds.
I think there are often opportunities for NHL general managers to do the same.
Every player, no matter how good, sees fluctuations in performance. Take Joe Sakic as an example. We use Sakic because he’s a star player, and between the two NHL lockouts he was both healthy and in the heart of his career (from the age of 26 to 32). Given those points, we would not expect to see massive fluctuations in his point production, yet we do. Ignoring games missed, Sakic’s point totals fluctuated from a low of 79 up to a high of 120. Those are 20% fluctuations from the median in either direction, and in a single season Sakic never hit his median – at his closest, he was at either 94% or 108% of the midpoint.
For a player like Sakic, that doesn’t matter: his point fluctuations kept him in the range of “very good” to “elite.” Everybody knew over that time period that he was a great player, and those fluctuations never changed that.
The problem, for a lot of players, is that they aren’t Joe Sakic. Most players see ebbs and peaks in their performances, so in any one season they might appear to be better or worse than their actual level of talent. For Joe Sakic, those fluctuations didn’t matter, but for many, many players they do. A mid-range player might look very good or not even NHL calibre, and as a result cause teams to over-invest or pass over him altogether.
The Detroit Red Wings are generally very good at identifying undervalued players. There are many examples, but I’m going to stick to Detroit here just because of the wealth of examples. For instance:
- Mikael Samuelsson. In 2000-01, Samuelsson made his North American debut in the San Jose Sharks’ organization. He put up phenomenal totals in his first AHL season, and would spend most of the next two in New York, where he was a decent if unspectacular option. Stints in Pittsburgh and Florida followed, and over his next 59 games Samuelsson scored just five goals and tallied a total of 11 points. Florida declined to make a qualifying offer and Samuelsson went overseas for the lockout. In 2005-06, the player Florida declined to offer a contract to returned to the NHL with Detroit, scoring 23 goals and 45 points, and he’s been a strong second-line player ever since.
- Dan Cleary. A first round pick in 1997, Cleary showed flashes of brilliance in the minors and with one of his three pre-lockout teams. Unfortunately, those flashes were relatively rare; he was traded by Chicago, bought-out by Edmonton, and let go by Phoenix. Detroit signed him after a decent lockout season in Sweden and the move didn’t pay immediate dividends as Cleary scored just three times in his first season with Detroit. Since then, however, he’s been a very good two-way player, and just topped the 40-point mark for the fourth time in five seasons.
- Patrick Eaves. Eaves was a first-round pick in 2003, had a great college career and scored 20 goals in 58 games as a rookie for the Ottawa Senators. His performance subsequently fell off; Eaves was dealt to Carolina, then to Boston, and finally in the summer of 2009 he was bought out. He’s been a very good depth player for almost no money over the last two seasons for Detroit, and he’s topped double digits in goals in both seasons.
The common link for these three players is that they were all cast off by bad teams. The early-2000’s Penguins, Panthers, Oilers, Coyotes, and more recently Carolina and Boston (during bad runs for both teams) aren’t exactly a murderer’s row of tough opponents. Yet, players who couldn’t cut those teams all found a home as useful players with a Stanley Cup contender.
Sometimes it pays to bet against the crowd. Especially if ‘the crowd’ is an assortment of general managers from mediocre teams.