Analyst upgrades and downgrades are just part of the market. It seems like every year there are more research firms capable of issuing their opinion on a company or a sector -- and trying to make sense of the upgrade or downgrade history of a company can be downright impossible. My Foolish colleague Rich Smith knows this well, as he covers a copious amount of analyst actions on a near-daily basis.
My usual rule of thumb is to completely ignore upgrades and downgrades, because they're almost always short-term share-price drivers. In short, analyst actions should rarely have much bearing on your buying or selling strategies in a company.
But a call made yesterday by Nomura Holdings, Inc. (ADR) (NYSE:NMR) on PetSmart, Inc. (NASDAQ:PETM) is going to coerce me to step outside my box and dub it the worst call of the week – maybe even the month!
Nomura's covering analyst, Aram Rubinson, lowered PetSmart to "reduce" from "neutral" and drastically lowered his firms' price target on the company, to $55 from $72. Central to Rubinson's argument is his belief that Amazon.com, Inc. (NASDAQ:AMZN) will become a greater competitor to PetSmart as shipping costs fall. Rubinson notes that as Amazon builds more distribution centers in higher-populated areas, its shipping costs for heavier food items will give it a distinct advantage over PetSmart.
As a pet owner, I see three major flaws with this analysis.
First of all, this analysis assumes that the market for pet products is stagnant when, in reality, that market is expanding at a rapid pace, according to research by the American Pet Products Association.
If the chart above appears familiar, that's because it is. It's one of the primary reasons I mentioned for being excited about Pfizer Inc. (NYSE:PFE)'s upcoming animal health division spinoff, Zoetis. The pie for pet dollars is expanding, which means that market share gains can be a bit fluid and yet everyone can still come out a winner. Even if Amazon were to garner a few sales of heavier food items, the general trend of 3% to 4% growth in annual pet product spending should fuel PetSmart's bottom line.