alarm:clock

- Wednesday, September 3, 2008

Chordiant: The Positives Outweigh The Negatives

Saying September is a lousy month for investing is an understatement. We at tech:stocker highly recommend a conservative approach to any new investments this month while not overreacting to the dips that normally happen. With the Fed's gloomy outlook for the near future, we don't see them lowering interest rates anytime soon and that's not good. The next wave of foreclosures, which we have predicted for the end of this month or the beginning of October, is going to hit a little harder than we originally predicted. It's going to be ugly so increase your cash reserves until the wave retreats.

Keeping with a conservative approach, we decided to take a look at Chordiant (CHRD:NASDAQ), a provider of customer experience software and services (aka CRM).

On the surface, Chordiant has several issues that make us pause before hitting the "place order" button. In this economy, companies are looking to trim IT expenses and software packages like Chordiant's usually don't survive the manager's axe and savvy investors know this all to well. Back in 2000 CRM software was considered a "must own" but so many companies have openly wondered about its effectiveness and have a hard time justifying the cost that many have shelved the software they purchased or have developed their own solution that is tailored to their specific needs.

Another concern is some questionable marketing communications strategies employed recently. One example is a press release issued in August announcing a new generation of case management capabilities for global insurance/healthcare, telco, and financial services companies. Unless there's very little substance to this new product offering, we definitely believe this is a missed opportunity to strategically market this offering to these influential industries. When the staff at tech:stocker worked in the financial services industry, we noticed that our employers generally worked with companies that understood the pain of companies in industry and incorporated that understanding into their products. At least that's what the marketing materials of the companies we saw working with our employers. As we stated previously, either Chordiant's new offering is not much more than press release fodder or they really don't understand the industries they are targeting.

Some hedge funds and investment companies have recently been reducing their holdings in Chordiant including Vanguard Group, Barclays Plc, Delaware Management Business Trust, and Black Rock Investment Management Llc. In Chordiant's defense, Intrepid Capital Management Inc increased its stake in the company by 550% and Royce And Associates Llc added it to its portfolio. Not quite a wash as the current trend by investment companies is to leave the company but it's certainly not a mass exodus.

Finally, we do have some concerns about the management team. Chordiant's Web site says the company "believes in attracting the best and brightest people". We're not sure how a VP of Worldwide Engineering with a B.A. in Psychology fits this description. A few of the staff at tech:stocker were pych majors and you wouldn't want any of them fixing a "system error" alert on your computer, let alone running a company's engineering operations.

So why are we going to put a buy rating on this stock? There are a few important reasons that ultimately outweigh everything we've previously stated. Chordiant has been delivering profits the last few years with only a couple of negative quarters. Their P/E ratio of 37.6 is on the upper end of where we feel comfortable investing but it's not out of the ballpark. And with Saleforce.com (CRM:NYSE) and its high valuation starting to come under investor scrutiny combined with SAP (SAP:NYSE) backing off their investment in SAP Business By Design, we see some opportunity for Chordiant to raise their profile and attract knowledgeable investors. While we wouldn't make Chordiant a cornerstone of our portfolio, we do think they are smart investment when adding a software company to the mix.

And if you want to have some fun, go to Chordiant's core values page and separate the values from their definitions. Send them to a few friends and see if they can match them up correctly. We sent them to 10 people and none of them came back correct.