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The Award for Worst Analyst Call of the Week Goes to...

Sean Williams
January 29, 2013

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 Financial on PetSmart (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 (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.

Source: American Pet Products Association. Figures in billions. *Estimated.

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'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.

Second, convenience is an important factor when it comes to making purchases online, but pet owners have been generally resistant to this trend when it comes to their furry friends. Now, don't take my words out of context here, because we have seen a dramatic jump in direct-to-consumer sales in pet products and medications. Online pet pharmacy PetMed Express (NASDAQ: PETS) has grown sales by an average