This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Analysts, Please Admit Your Mistakes -- Today's Outrage

BOSTON ( TheStreet) -- Once, just once, I'd like to see an analyst admit to an error in judgment. Because, let's be honest, we can't always get it right, and it happens all the time.

Case in point: Bank of America's Merrill Lynch brokerage yesterday cut its rating on Netflix to "neutral" and gave it an $80 price target. The rating change, from "buy," was made after the fact, following the company's disappointing third-quarter report, which led to a selloff in the shares of nearly 40%.

Merrill's previous price target was $225. In an earlier analysis, Merrill had estimated $6.42 in earnings per share for 2012, and $9.16 for 2013. In the revised report, Merrill slashed those estimates to $0.73 and $3.14, respectively.

The analysts missed it. Big time. And the reason to go to "neutral"?

"With profitability evaporating as content costs soar and subscriber growth stumbles, we see few near-term drivers that could push the stock upwards other than buyout speculation."

Huh? Didn't you know this? Did it only take the third-quarter letter from management and the Q&A to tell you that content costs were going to weigh on earnings?

Only five days ago, on Oct. 21, you were saying this:

"We expect Netflix to continue to gain ground, with subscriber and revenue growth accelerating as they use incremental gross profit dollars to buy more content and thus make their service more appealing to consumers."

So content costs are all of a sudden a factor? This story has been around for quite a while. You missed it, plain and simple.

I don't want to single out Merrill Lynch. There are others at fault as well. Besides, the company provides a lot of great analysis.

My colleague Rob Holmes had a great piece yesterday that spoke of several analysts who also missed the boat and one who got it right. I haven't read through every Netflix report, but my guess is that none admitted to their mistakes.

In closing, I'd like to help Merrill and other sell-side analysts rewrite their reports. This is a one-liner that you can use for Netflix (and maybe a few others you have gotten wrong):

"Dear investors: I screwed up. I didn't pay close enough attention to some of the key drivers of costs and profitability. Please accept this revised (after the fact) rating as an admission of my awful mistakes. In the future, I will attempt to work harder, and try to make more of an effort to get the facts straight, even before they are laid out in plain sight for me to see at the quarterly conference call.
Equity research manager Chris Stuart, CFA, joined TheStreet Ratings after working as a senior investment analyst with Merrill Lynch covering small-cap equity and alternative investment strategies. Prior to that, Stuart worked for One Beacon Insurance as an actuarial analyst and at H&R Block as a financial adviser. Stuart earned his bachelor's degree in finance from the University of Massachusetts, Amherst. He holds a Chartered Financial Analyst (CFA) designation and is a member of the Boston Security Analysts Society (BSAS) and the CFA Institute.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
NFLX $115.03 -2.21%
AAPL $112.76 -0.47%
FB $89.43 -1.74%
GOOG $618.25 -1.92%
TSLA $249.06 0.23%

Markets

Chart of I:DJI
DOW 16,528.03 -114.98 -0.69%
S&P 500 1,972.18 -16.69 -0.84%
NASDAQ 4,776.5080 -51.8170 -1.07%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs