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Pandora is wounded, Zacks is diappointing

Updated: November 26, 2012 6:43AM



Dear Mr. Berko: Last June, I bought 300 shares of Pandora Media at $23. I thought this would run to $50 because I believed its business model would take over the music broadcasting industry as Rome took over most of the world. What did I miss, and where did I go wrong? Do you think I should hold the stock? Do you know Zacks? I’m interested in buying $8,000 of Zacks Small-Cap Core Fund, which also came public in June 2011. The fund reported that it beat the Russell 2000 benchmark by 5.99 percent, which seems like a very impressive performance. Please give me your expert guidance and advice.

— ER, Durham, N.C.

Dear ER: Pandora is a seriously wounded gladiator; the lions are circling, and the carrion birds are not far behind. Online music services Spotify and Clear Channel’s iHeartRadio recently have added Pandora-like custom radio features to their programming. Even Apple is exploring a custom radio service similar to Pandora (P-$10.02), which could blow Pandora out of the box, encouraging its 60 million active listeners to change the dial.

Though Pandora’s revenues in the past five years have zoomed from $7 million to $386 million, its inutile management can’t figure out how to turn a profit. It seems the collection of idiots who run this abomination couldn’t pour water from a hole in the toe of a size 14 boot if the instructions were printed on the heel in English. And you’ve got to be indelibly dumb to believe the cotton candy projections of New York’s financial mafia (JPMorgan Chase, Citigroup and Morgan Stanley), which took Pandora public. These Wall Street firms would, with alacrity, promote Iranian President Mahmoud Ahmadinejad for a commission and a piece of the action. However, sky-high royalty expenses have prevented Pandora from making a profit, and the company’s acquisition costs continue to grow by double digits. You should realize that you can’t trust JPMorgan Chase, Citigroup or Morgan Stanley and should have done your research before you bought the stock.

Apple’s licensing deals with numerous record labels will give users better interactivity than they have through Pandora. Apple’s prodigious resources and its siren lure are formidable; even Eve couldn’t compete.

As Pandora continues to be a profitless company, its possible demise is righteous. Sell it, and don’t look back.

The Zak’s I like may be the finest seafood and steak restaurant in Adelaide, Australia. It never disappoints, and its intimate waterfront dining offers an elegant and romantic atmosphere. The Zacks I don’t like, the Zacks Small-Cap Core Fund (ZSCCX-$16.43), is an ignominious disappointment. Management’s claim that its one-year return bested the benchmark Russell 2000 index by 5.99 percent is profoundly disingenuous. Its first-year performance (June 2011 to June 2012) was a positive 3.91 percent, but golly gee, the sales tax in your state is almost twice that amount. After nearly six weeks of complex and intense research, Zacks’ management discovered that the Russell 2000, between June 2011 and June 2012, was down 2.08 percent. So Zacks’ clever lads combined their fund’s 12-month performance of 3.91 percent with the minus 2.08 percent of the Russell 2000 and arrived at the 5.99 percent number. And if the Russell 2000 had been minus 20 percent for that 12-month period, Zacks could have proclaimed to the world that it bested the Russell by 23.91 percent. The numbers don’t lie! But considering how well its small-cap competition did (T. Rowe Price 21 percent, Waddell & Reed 21 percent, LongLeaf Partners 20 percent and Legg Mason 20 percent, to name a few), Zacks had to do something to mitigate its embarrassing performance.

I think Mitch Zacks is a pretty smart fellow. I appreciate his firm’s vast capabilities and good research data. However, I’m disappointed that Mitch is unable to use his skills to run a $900 million small-cap mutual fund. There’s no reason to buy ZSCCX.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com.



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