Why I'm Selling Palm and Buying ClickSoftware

This week I am removing Palm Inc. (PALM) from my portfolio. I don't want to hold on to Palm, now that Apple Inc. (AAPL) is set to launch the iPhone, its new touch-screen mobile phone.

There is no point in holding on to Palm, seeing that its potential buyers appear themselves to have cooled and to be holding off a decision pending the "iPhone effect" after June. What's more, even if there is an acquisition in the pipeline, the price will not be much higher than the current market price.

In place of Palm, I am adding a small Israeli software company, Givat Shmuel-based ClickSoftware Technologies Ltd. (CKSW), which specializes in software solutions for mobile workforce management and service. I have had my eye on this company, which was founded by company chairman and CEO Dr. Moshe Ben Bassat, for some time, and I decided to add it to my portfolio after it announced last week that it would be publishing its report for the first quarter of 2007 on May 2, a commonly accepted sign that no warnings are in the offing. In times like these, when small stocks disintegrate following profit warnings, I prefer to pay more for a stock, rather than find myself facing a nasty surprise in the form of an unexpected warning.

ClickSoftware currently has a market cap of $100 million, and it is expected to have sales of $40 million for 2006, compared with $32.4 million for 2005, and a profit (before options) of $2.7 million. The company currently has more than $20 million in cash. Over recent quarters it has managed to grow in the most important item of all for software companies - license sales. ClickSoftware sells to large customers in various sectors, and in 2006 it significantly increased it sales in the U.S., most notably to utility providers, such as electricity companies that have many service personnel out in the field.

Last week's 16% gain for ClickSoftware was due, I feel, to three factors. The first of these was the announcement of a large customer from the document management sector, probably Xerox Corp. (XRX). The second is the sigh of relief following the announcement of a date for its financial report which I referred to earlier. The third is the fact that last week the company published its annual 20F report for 2006. In these days of irritating companies such as Taro Pharmaceutical Industries Ltd. (TARO), considerable importance is attached to the fact that a company, especially a small one, has produced this report two months before the deadline.

What is more important is that anyone who reviews this report by ClickSoftware will find some interesting things, such as the expectation of continued growth for 2006, including the belief that the existing ratio between license and service sales will be maintained. The report also noted that the contacts between ClickSoftware and IBM, which the company reported back in 2004, have now progressed to negotiations on the method of payment to the company for sales made by IBM.

Of course this stock is risky, just like any small stock is, and it is not all that cheap either, if I compare it to Eltek Ltd. (ELTK), for example, which I also have in my portfolio. That said, I have long since learned that in the software sector, if you can manage to increase your license sales to as many customers as possible, sometimes the sky is the limit since the giants will get back to you with more orders.

PALM vs. CKSW 1-yr chart

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.