Buying Low on Bautista

Coming into the start of this MLB season, if you were to have looked at Toronto Blue Jay Jose Bautista's career statistics, you would have had to acknowledge that the Blue Jays signing him to a five year, sixty five million dollar contract posed a significant risk to the organization. Though he had had a seven month stretch of MVP-like power production prior to the 2011 season, for the previous six years of his career Bautista was a reserve player. Toronto Blue Jays general manager had a huge decision to make: he had to decide what type of contract the team would offer their right field, given that Bautista's existing contract was due to expire at the end of the 2011 baseball season: “Should the contract be based on expectations that Bautista will continue to perform at his 2010 level of performance, opening the team up to the risk of substantial overpayment, or should the team hedge its bets, give Bautista a one or two year contract, and hope that if he continues to excel, they can still afford him when his contract is up again. Jays GM Alex Anthopoulus ended up avoiding the “safe” approach, and paid Bautista more money, for a longer period of time than most people thought it was reasonable to pay him at the time, given the short duration of his recent excellent form. The risk for Anthopoulus in this move was compounded by the fact that he had in his relatively short tenure as GM become very much trusted by Blue Jays fans as an executive who makes wise decisions with the organization's money.

Decisions on baseball contracts are essentially a question of making an investment. As is the case with investments in the stock market, real estate, or any other kind of asset, everything boils down to assessing value. One of the necessary skills for stock market investing is being able to assess the true value of an asset, and comparing it with its market value. Obviously when you feel a stock is over valued it is a good time to sell it, and when it is undervalued it is a good time to buy. The average baseball team, if it is to compete with the other teams in its division, needs to get good returns on its investment in players in order to succeed. However in the current AL East Division, unless you are the Yankees or Red Sox, good returns are not enough; you need to get GREAT return on your investments. I think in order to be a good organization, you need to know who are the players to buy, but in order to become a great baseball organization, you also have to master the questions of WHEN to buy those players.

Obviously it is still very early to say how Bautista's contract will work out for the Jays over the long term. However, it must be acknowledged that this could potentially be an outstanding deal for the organization. It is my view that moves that have the ROI potential we see in Anthopoulus' signing of Bautista are not achievable if you rely solely on the type of completely risk-averse strategy of relying solely on conventional statistical analysis of past performance. To beat the market you have to see an emerging trend before it actually has become a trend – you need to see that an asset is worth more than the numbers are telling everyone it is worth. The market for Bautista's talents at the start of the year (i.e. Based on the 1 year and a month of superb performance figures and six years of mediocre numbers) would have suggested a contract for less money and fewer years (many sports analysts suggested around 2 years at $10Mil per year would have been fair) than the contract that Alex Anthopoulus gave to the player (5 years at $13 Mil per year). However, for some reason the Jays general manager felt that Jose Bautista's market value was lower than his actual value. If Bautista continues to perform as he has been Anthopoulus will have been able to lock up an exceptionally talented slugger for a long time, at a bargain price (see the figures below to get a sense of how Bautista's recent production along with his future contract figures compares with some of the top power hitters in the game). Anthopoulus' decision may still blow up in his face, but at this stage in the game (and based upon Bautista's continued success about a 1/4 a way into the MLB season), at least you can see the rationale behind the decision to take the risk.

Comparisson Between Bautista and Other Top MLB Sluggers

Adrian Gonzales (Age 29) - 2010: 31 HR; 101 RBI; .298 BA; .511 SLG

2011 (until May 15th): 9 HR; 34 RBI; .319 BA; .577 SLG

*** On a contract paying him $22 Mil per year over 7 years

Albert Pujols (Age 31): - 2010: 42 HR; 118 RBI; .312 AVG; .596 SLG

2011 (until May 15th) - 7 HR; 24 RBI; .266 AVG; .418 SLG

*** Expected to sign a contract of around $25 Mil per year over 8 years

Ryan Howard (Age 31) 2010 - 31 HR; 108 RBI; .276 BA; .505 SLG

2011 (until May 15th) - 9 HR; 35 RBI; .260 BA; .513

*** On a contract paying him $25 Mil per year over 5 years.

Jose Bautista (Age 30) - 2010: 54 HR; 124 RBI; .260 BA; .617 SLG

2011 (until May 15th) - 16 HR; 27 RBI; .368 BA; .868 SLG

*** On a contract of $13 Mil per year over 5 years