Many years ago I learned to treat stock analysts reports with more than a grain of salt. In case you haven’t yet reached that same conclusion you might want to read this blog posting which details how poorly Wedbush Morgan analyst Michael Pachter projections on Netflix and Blockbuster video played out over a period of one year. In fact it is hard to imagine how someone could be so incredibly wrong. Not to pick on the guy for a set of projections horribly wrong but the degree he was off is simply stunning.

In short analyst Pachter predicted the following would result over the 12-month period starting April 2005:

Netflix (NFLX) would drop from $11.20 to $3.00
Blockbuster Video (BBI) would increase from $9.96 to $13.00

Based on this information (from a professional stock analyst no less) someone might have decided to short Netflix and buy Blockbuster. For almost no money (in fact shorting 1,000 Netflix shares would have brought more money than buying the 1,000 Blockbuster shares) this would have been an easy trade to do and your expected profit would be $11,240. But I pitty the fool who followed Pachter’s advice.

Here is reality:

Netflix (NFLX) would drop increased from $11.20 to $3.00 to $29.64
Blockbuster Video (BBL) would increase decreased from $9.96 to $13.00 to $4.79

Instead of making $11,240 you would have lost $23,610, a difference of $34,850!

Of course this simplistic view assumes the nominal trading costs associated with buying/selling/shorting and that the buyer/seller wouldn’t have woken up 6 months into this figuring out that Pachter in reality had no clue as to where these stocks were going. However even Pachter didn’t figure it out and over the 12 months adjusted his price targets of one or the other 5 times and still didn’t get it right so you could imagine him saying “hold the course, it will turn.” No it didn’t!

This posting isn’t about picking on or singling out Pachter or Wedbush Morgan but instead to highlight the dangers of following their advice. Analysts tend to be too close (where they can’t see the forest through the trees) or too far away (where their advice is no better than what one can get reading the WSJ) from their subjects. They can write insightful positioning papers and analyze the challenges that companies or sectors may face. However when they attempt to distill all of the complexity inherent with a stock price down into price targets one can see that they are no better than a monkey with a dart board. In fact, the monkeys would have kicked their ass this time around.

Note: we received an unsolicited email from Davis Freeberg promoting the article (see we do read our mail) linked above which resulted in this posting and did indeed find it a worthy read and believe you will as well. Pachter responded to Freeberg and you can read what he had to say in response.

tags: blockbuster netflix Wedbush stock market

This entry was posted on Monday, May 1st, 2006 at 9:05 am by Insider and is filed under How Not To Succeed In Business, I knew I'd use my Econ major. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.