It is often said that to be successful in the stock market, it's important to diversify where one invests their assets. Investopedia.com recommends that prospective investors "spread the wealth" by including a myriad of stocks and sectors within their portfolio, entrusting a handful of different companies that they know and trust to help grow their money. But instead of investing money in companies listed under the NASDAQ or S&P 500, what if one could instead invest money in a professional athlete?
Fantex Holdings, Inc. has been making this idea a reality since it was founded in 2012. With former professional athletes such as John Elway (board of directors) and Jack Nicklaus (board of advisers) in the fold to assist founder David Beirne, Fantex has negotiated contracts with fifteen professional athletes in a number of sports, beginning with their initial IPO of NFL tight end Vernon Davis in 2013.
So far, five professional baseball players have entered into contracts with Fantex. Angels lefty Andrew Heaney was the first to do so back in September of last year, receiving a $3.34 mil up front payment. Fantex announced recently that five more players had agreed to sign with the company: Orioles 2B Jonathan Schoop ($4.91 mil), Phillies 3B Mikael Franco ($4.35 mil), Astros RHP Collin McHugh ($3.96 mil), Padres 3B Yangervis Solarte ($3.15 mil), and Twins RHP Tyler Duffey ($2.23 mil). All agreed to sign in exchange for 10% of their future "brand" except Solarte, whose contract calls for 11%. All of these deals have received a stamp of approval from the league and the MLBPA.
Here's how it works:
Athletes are offered a one-time, up front payment by Fantex in exchange for a certain percentage of their future earnings. This includes any salary earned from playing as well as other income like endorsement deals, appearance fees, etc. "Shares" in the athlete are then sold to the public (though potential investors are put through a rigorous screening process before buying) to cover the cost of the initial payment. Those shares represent the 10 percent interest in that athlete's future income. Once an athlete has surpassed an earnings threshold of greater than 10 times their initial payment, then investors can begin to receive a return on their investment. There is a not-insignificant amount of risk involved in these deals for Fantex and investors, as well. If a player suffers a career-ending injury or is unable to perform up to par and secure another contract, then it would be a sunken cost.
Let's take the case of Tyler Duffey, the 25 year old former fifth round draft pick of Minnesota Twins. Duffey received a $267,000 signing bonus and has only earned about $190,000 during his 68 days in the major leagues over the last two seasons. That's no small amount of money in the grand scheme of things, to be certain, but Fantex's up-front payment of $2.23 mil is the kind of money that could carry a person through the rest of their life if they use it responsibly.
Through his contract with Fantex, Duffey was able to essentially guarantee a lifetime of financial well-being without having to delay his potential free agency timeline by agreeing to a long-term extension with Minnesota. In exchange, once Tyler crosses the $22.3 mil threshold in career earnings going forward, investors will be able to begin cashing in.
Let's say Duffey continues his current trajectory (3.05 ERA, 3.50 FIP through 62.0 career innings) and spends the next six seasons as an anchor in the middle of Minnesota's starting rotation. That could put him in line for something similar to the $80 mil deal that was signed by Mike Leake this past winter. Duffey would theoretically be responsible for paying 10 percent, or $8 mil in this case, of that to investors. But he would still come away with $72 mil. That's significantly more than he'd be likely to net on a pre-arbitration extension and doesn't require having to give up any of his free agent years.
This type of arrangement could very well become more commonplace throughout the game and may lead to less players signing lengthy pre-free agency extensions. Rather than trade away potential free agent seasons in exchange for what could end up being below-market future salaries, players could instead elect to lock in a smaller (though still life-changing) sum of money early on while still being able to hit the open market after their reserve clause has expired.
With a younthful team and a top-tier farm system, there are plenty of young and talented players within the Brewers' organization that could perhaps be interested in such an arrangement. Since all of the players that Fantex has signed so far are current big leaguers, here are three players on the Brewers that I'd be willing to buy stock in:
1. RHP Jimmy Nelson
Nelson has already played nearly two full seasons in the big leagues and received a $570,600 bonus after being selected in the second round of the 2010 draft, so he may not exactly be motivated to sign a deal with Fantex at this point.
If he were, though, I'd be quick to scoop up some stock in the 26 year old right hander. He already appears to have established himself as a stable presence in the middle of any big league rotation, holding a 4.09 ERA and 4.12 FIP through his first 288.0 big league innings. His sturdy build (6'6", 245 lbs) lends itself to being able to remain durable while throwing 180+ innings, and there will always be a demand for steady, mid-rotation innings eaters. That gives Nelson a reasonable earnings floor when he figures to hit the free agent market following the 2020 season.
There's still a chance that Nelson could be more than that, though. Nelson's addition of a curveball last season raised his ceiling to that of a potential number two starter and the hope is that he'll continue to improve as he refines his three-pitch arsenal. If Jimmy can indeed take that next step, he could be looking at major money when he hits the free agent market. With a high floor and a potentially high ceiling, Nelson stock looks to be a reasonably safe investment.
2. OF Domingo Santana
Where Nelson appears to be a relatively safe bet to provide a solid ROI, Domingo Santana looks more the part of a high-risk, boom-or-bust type stock. While Santana has long been lauded for his prodigious power potential, his 30+ percent minor league strikeout rate left scouts questioning whether or not he'd make enough contact to be a legitimate threat in the big leagues.
It's still very early in the season and early in the 23 year old's big league career, but so far he's looked quite promising. Batting from the lead-off position this season, Santana has continued to exhibit an excellent ability to draw walks and get on base in spite of his high strikeout totals. As Mike Petriello of MLB.com noted, Santana is also leading the league with a 96 MPH average exit velocity and is registering hard contact at one of the highest rates in the big leagues.
Santana still has a long way to go to prove that he'll be a productive major leaguer over the long-term, but the early returns thus far are promising enough that I'd be willing to roll the dice on some Santana stock. Even fourth outfielders have been able to score multi-year deals in excess of $5 mil AAV in recent years, and players with power like Domingo's are generally given more than a few chances to prove they can stick in The Show. If Santana can reach his ceiling as a perennial 3-4 WAR player, he'll be in line for a major deal when he can become a free agent following the 2021 season.
3. SS Jonathan Villar
Of the three players that I listed, I suppose Villar is the one I feel least confident in. He got a few chances to prove himself as Houston's shortstop of the future and failed to gain a footing before being supplanted by the excellent Carlos Correa. Milwaukee and Slingin' David Stearns rolled the dice by acquiring Villar over the winter to man shortstop on a daily basis for the Brewers, and to this point he's shown that he's up to the task with a .262/.377/.369 slash and 3 defensive runs saved at shortstop.
Given his lack of power the upside on Villar isn't outstanding, but he could be the type of player that can be an average starter in the middle infield. He's got a good hit tool and blazing speed, and so far this year he's shown a much improved eye at the plate and could become a consistent on-base threat. While a borderline starter/utility infielder isn't the sexiest player, that's someone who could stick around the big leagues for awhile and continue earning major league money. For that, I'd be willing to assume what figures to be a smaller financial risk than the other two players, but one that comes without their aforementioned upside.
Statistics courtesy of Fangraphs