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How Everyday Investors Can Benefit From Channel Checks

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To get an edge on how well Apple, Microsoft, and other companies are doing, all you need is Internet access, a phone, and a pair of shoes.

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The Poor Man's Channel Check

"The most valuable commodity I know of is information."
-- "Gordon Gekko" (Wall Street)

As a technology investor obsessed with gadgets, gizmos, and games, I'm constantly on the hunt for an edge; a single piece of relevant information that the crowd doesn't know about, or doesn't appreciate.

To put it more specifically, I'm obsessed with figuring out how well specific products are selling before the masses understand what's going on.

Now to get an edge on who's selling how much of what, I have to get out in the real world and hunt down information that isn't found in the same research reports and 10-K filings that everyone else is poring over.

That means engaging in what's referred to on Wall Street as the channel check.

What Is a Channel Check?

A channel check a method of analysis in which one uses information derived from distribution channels to form an opinion about a company or industry's performance.

For example, in order to gauge demand for PCs, an analyst may use contacts at component suppliers or retailers to help fill in the blanks. If memory supplier X says computer company Y can't get enough memory this quarter, that's a positive indicator.

But I Don't Have Contacts at Semiconductor Companies!

Neither do I!

But what we do have is access to heaps and heaps of retail outlets from which we can learn a lot about the sales of just about any technology product.

All you need is Internet access, a phone, and a pair of shoes. You certainly don't need a Wall Street-sized research budget.

Now I'd like to emphasize that what I call "The Poor Man's Channel Check" isn't exact science. It's also not rocket science.

And it's meant to augment your research process, not replace it.

At the very least, you can use channel checks to stress-test an investment thesis. If you really think something is selling well, it shouldn't be hard for you to come up with some real-world evidence.

The Amazon Effect

Amazon.com (AMZN) has inadvertently given technology investors one of the most useful tools in history: its barrage of best-seller lists. With $33 billion in expected sales this year, you can be sure that if a product is number-one in its category on Amazon, then it's a widespread hit. And if it's not up there on Amazon's charts, forget it -- it might as well be dead.

So let's throw out a question: Is Microsoft's (MSFT) Zune catching up to Apple's (AAPL) iPod? Amazon's mp3 player sales chart, which has eight Apple products in the top 10, says no.

Even cooler is that yet-to-be-released products can show up on Amazon's sales charts based upon pre-orders alone. Virtually any product that can dominate on Amazon before actual release is a winner.

Back in 2006, Activision's (ATVI) Guitar Hero 2 was topping Amazon's charts weeks before its official release -- a clear sign that the franchise was crossing over into superstardom.

There are a myriad of other free online information sources technology investors can tap into; just look for any site that reveals sales rankings, products that are out of stock, or deep discounts. That means online retailers, company sites, and deal-promotion sites.

Just be aware that online information changes very quickly, so monitor over time, not just at an instant. And while price cuts can quickly increase a product's popularity, full-priced bestsellers should always be your focus -- at least if you're looking for positive signs.

And while online channel checks work well for technology products, the same isn't so true for traditional consumer products, or for retailers themselves!

A Real-World Example of an Online Channel Check

Let's say we're trying to figure out which smartphones are hot. We can spend all day reading reviews and articles about the latest models, but that doesn't mean we actually know what people are buying.

So let's look at recent history, based entirely upon what I've seen online.

Shopping for a hot Google (GOOG) Android phone over the past few months indicated huge pent-up demand, telegraphing Google's recent announcement that 200,000 Android phones were being activated each day.

Wait times for the HTC Droid Incredible exceeded three weeks -- a clear sign of strong demand given away for free by Verizon's (VZ) website. Motorola's (MOT) popular Droid models were similarly difficult to find in stock online.

And as of the time I'm writing this, two of Verizon Wireless' five Android phones are back-ordered for more than two weeks. Plus, Sprint's (S) website has shown intermittent shortages of HTC EVO 4G Android phones.

As for the much-discussed Apple iPhone 4, Apple's website shows it with a three-week wait time -- the same as in mid-July.

So ask yourself: Do I need to wait for someone else to tell me what's selling? Or is it enough to see that these phones can't be made fast enough?

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No positions in stocks mentioned.
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