This blog was first featured on the Wells Fargo Asset Management blog on February 4th, 2021.
On February 2, 2020, the Kansas City Chiefs came back to defeat the San Francisco 49ers 31-20 to win Super Bowl LIV in Miami. This is notable on many levels: It was the Chiefs’ first Super Bowl title in 50 years; young superstar quarterback Patrick Mahomes led his team to three touchdowns in the final 6 minutes and 13 seconds to erase a 10-point deficit; and the Analytic Investors team correctly predicted the outcome for the second consecutive year, bringing its historical record to an impressive 12-5 (71%) against the spread.
Little did football fans know that this would be the last sold-out stadium in any sport for quite some time. Just over a month later, the COVID-19 pandemic put the U.S. and other countries on lockdown.
But the NFL endured and adapted. It held the first-ever, all-virtual draft in April, which saw its highest TV ratings ever. The league shortened training camp and eliminated preseason games (no one seemed to mind). Then, it managed to be the only major professional sports league to start its season and complete all regular-season games on time, in front of few or no fans.
There were hiccups and twists along the way due to COVID-19 outbreaks, but these in turn led to new phenomena like Monday night doubleheaders and games on Tuesday and Wednesday evenings. And let’s not forget game number 256, in which Philadelphia Eagles Head Coach Doug Pederson threw his third-string quarterback into a close game, allowing the Washington Football Team to clinch the NFC East and eventually cost him his job. So much for the “Philly Special”…
The remarkable season comes to an end in Tampa on Sunday, February 7, when the defending-champion Chiefs face the Tampa Bay Buccaneers in Super Bowl LV. The match-up features an epic quarterback duel between the young-gun Mahomes and the ageless wonder Tom Brady, who’ll make a record-setting 10th Super Bowl appearance. (Tony Romo is sure to be excited in the CBS broadcast booth.)
What is NFL Alpha?
In 2003, the Analytic Investors team decided to apply its quantitative approach to investment management to the NFL. We devised a formula that calculates the cumulative return on investment (ROI) relative to market (wagering) expectations for every team’s 16 regular season games. We call it “NFL Alpha.”
To illustrate this concept, let’s use the Miami Dolphins (the team with the highest Alpha in 2019). We’ll assume a hypothetical bettor places a $100 wager on the “money line” for the Dolphins to win all 16 of their 2020 games. If Miami loses a game, the bettor has lost $100; if they win, the bettor would collect back the $100, plus an additional sum that’s computed based on the team’s win probability per market expectations. At the end of the season, the bettor adds up all winnings and compares that dollar amount with the $1,600 total wagered throughout the season. Anything less than $1,600 implies a negative Alpha, and anything greater is a positive Alpha. The Dolphins wagers would’ve added up to over $2,143, thanks to the team’s second-best 2020 NFL Alpha of 34.0% (Table 1). (An interesting side note: The Dolphins had a whopping 70.3% Alpha in 2019.)
Alpha isn’t just about wins
Each year, we like to take a closer look at the Alphas of top- and bottom-ranked teams. The 32nd-ranked team isn’t usually a shocker as it tends to be one of the league’s worst performers. However, the top-Alpha team isn’t as easy to predict. 2020 was no exception. The Jacksonville Jaguars started off strong, upsetting the Indianapolis Colts in week 1. But, they didn’t win another game. This freefall also left them with a league-low Alpha of -75.5% (Chart 1).
The team at the top of the Alpha rankings was the resurgent Buffalo Bills. They went 13-3, thanks to rising-star quarterback Josh Allen’s newly acquired wide receiver, Stefon Diggs, and a stout defense. Interestingly, the Bills’ Alpha of 40.7% isn’t particularly large compared with the top-team Alphas of prior years, indicating the market makers were a bit more efficient this year. After a 4-0 start, the Bills lost to the Titans and Chiefs, then squeaked out a victory against the winless New York Jets that left them with an Alpha of 8.7%. Buffalo went on to win eight of their last nine games, enabling the team’s Alpha to stay in positive territory for all 16 weeks (Chart 1).
The “lottery ticket”
The Analytic Investors team has managed low-volatility equity strategies since 2004 based on the team’s published research, which showed that low-risk stocks have generally outperformed their high-risk counterparts over time. We’ve also noticed a similar trend when it comes to the NFL: Less-risky, lower-payout wagers on teams that are large favorites have tended to outperform riskier ones placed on large-payout, heavy-underdog teams (commonly referred to as “lottery tickets”).
We saw this trend reverse in the 2019 season, and it continued into 2020. Low-risk wagers returned -1.3%, while the longshot, high-risk ones returned 36.8% (Chart 2)—a whopping outperformance of 38.1%. A big reason? Underdogs performed well this season, including one of the biggest upsets in modern NFL history: The 17-point underdog, winless Jets went to Los Angeles and shocked the Rams by winning 23-20. (This was a small consolation considering the Jets ended up missing out on the top pick in the draft.)
Our research has found that NFL teams tend to revert back to their average longer-term success ratios: Teams that outperform expectations in one season tend to underperform expectations in the next (and vice versa). We’ve also observed that this trend is apparent as soon as a season’s playoffs. More specifically, teams with higher NFL Alphas usually have underperformed in the postseason, thus making the team with the lower Alpha the better selection to cover the point spread.
Following a rare sub-.500 record in last year’s playoffs, our model rebounded nicely this year with an 8-4 record (Table 2). This brought our historical average back up to 61%. Were it not for the Chicago Bears dropping an easy touchdown or not bothering to attempt a PAT (point after touchdown) at the end of their game against the New Orleans Saints, we would’ve been an impressive 9-3. This is why you don’t gamble, kids.
Super Bowl LV
Super Bowl LV features the 4th-ranked Chiefs (26.4%) against the 16th-ranked Buccaneers (0.2%) (Table 3). While Tom Brady’s separation from the New England Patriots and coach Bill Belichick was shocking, it actually resulted in a 3.5% decline in Tampa Bay’s Alpha from 2019. But it’s certainly paid dividends on the field. As always, storylines are abundant in this game: The Bucs are the first team ever to play for the Lombardi Trophy in their home stadium, the game is a rematch of a 27-24 Chiefs victory in week 12, and the Chiefs will be looking to become the first back-to-back champions since—you guessed it—Brady’s 2004 Patriots. And just in case you haven’t seen those ubiquitous commercials enough, The Weeknd will be performing in the halftime show.
Despite the fact that the Bucs have the third-lowest Alpha of any team that’s appeared in the Super Bowl since 2004, they’re our pick to either win outright or lose by less than 3.5 points. Since 2004, our model is an impressive 8-1 (89%) in predicting Super Bowl winners when the Patriots aren’t playing (a positive sign). But keeping in mind that Brady wasn’t playing in any of those nine games, it remains to be seen if our prior successes can be correlated to a lack of Brady or a lack of Belichick. Until then, our optimism will remain cautious.
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