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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.

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