Cleveland Research's notorious channel checks are moving the markets once again -- this time causing some Fitbit (FIT) shareholders to run for the hills.
The opaque, anti-media, approximately 80-person-strong firm released a note this morning saying it is cautious on Fitbit heading into the fourth quarter -- and into the first quarter of fiscal year 2017. Cleveland Research says new-product uptake is muted and it is concerned about inventory levels, according to TheFly.
And if you thought at the beginning of the trading day that Cleveland Research's influence was waning, since FIT shares had dropped just 1% by 10 a.m., think again. Shares continued to fall, and they were down by nearly 3% during midday trading -- which is almost as substantial as the impact of its takedown on Thermo Fisher Scientific (TMO) in September, or even its most recent action on Dollar General (DG) and its rival Dollar Tree (DLTR) . But given that the firm claims to have 150 of the largest hedge funds and mutual funds as its clients (who pay at least $250,000 annually for the reports), it is easy to understand how this firm from the midwest can command such action in the market.
Sure, Fitbit is in in the midst of a major transition.
CEO James Park told TheStreet's Jim Cramer on Mad Money yesterday that the company is shifting its mission and purpose from simply consumer electronics to become a digital health-care company. Cramer believes that there is "big money" in Fitbit's digital health plans. But Cramer, admittedly, loves the products and the company.
A third-party study announced this week, however, found that employer health-care costs for employees that opted into a Fitbit wellness plan was 25% less than market average, which translated into approximately $1,300 in savings per employee, according to Fitbit.
And as for those channel checks, which Cleveland Research prides itself on, there seems to be growing skepticism around them (especially after so many Apple (AAPL) analysts' channel checks clearly underestimated the demand for the iPhone 7).
As we reported previously, Pacific Crest, another research firm also known for its channel checks, put out a note on Sep. 28 that said the new Fitbit device has too much inventory accumulation. Sounds familiar, right? Well, Park said, in his Mad Money interview yesterday, that the company "just started shipping the product," adding that Fitbit Charge 2 is the number one, best-selling fitness tracker on Amazon (AMZN) right now. (Amazon is a holding in TheStreet's Growth Seeker portfolio).
So, how can channel checks truly judge demand when the product is just hitting the market and consumers are still learning about it? Sure, they can provide insight, but they won't necessarily reveal the whole picture, as was clearly evident with Apple's iPhone 7 release. (Apple is a holding in Jim Cramer's Action Alerts PLUS portfolio).
But nonetheless, investors should continue to be aware of Cleveland Research's presence -- especially ahead of earnings season, which is its prime time for putting out notes. As we have seen, a comment from this firm can move the market.
