Commtouch (NASDAQ: CTCH), a leading provider of email defense systems, announced today that Check Point Software (NASDAQ: CHKP) has entered into a licensing agreement with the email firm. Commtouch's defense works on a three-pronged approach. Reputation service for blocking unwanted mail traffic at the perimeter, significantly reducing the necessary IT resources for handling email; Zero-Hour(TM) Virus Outbreak Protection to complement traditional anti-virus solutions; and Anti-spam, which works against all formats and languages including Asian languages, image spam and attachment spam.

Speaking to the importance of this deal, CEO Gideon Mantel said, "Check Point's choice of Commtouch as the best solution for its customers after a period of rigorous testing further validates our technology and is an important milestone for Commtouch. Commtouch is the only technology provider of three layers of email defense that, together, ensure continued effectiveness in the face of constantly changing threats. We believe this important and strategic agreement will positively impact our business."

Commtouch's business has been growing rapidly. The company had set a goal for 30 new deals for all of 2007, and it had almost achieved that goal by the end of October. Clearly there is a need for email spam protection; for investors looking at a small company making headway in this field, the stock may be a very attractive long-term play.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. Disclosure: Writer owns stock and is long both CTCH and CHKP , as of 12/10/07.

In his Ahead of the Tape column [subscription] in the Wall Street Journal, Justin Lahart raises an interesting possible explanation for the outperformance of small-cap stocks:

The surge in leveraged buyouts has spawned a cottage industry aimed at figuring out which company might be the next big takeout candidate. Wall Street has been screening for low debt levels, hefty cash flows and the like to come up with lists of would-be LBO candidates. One reason shares of companies with smaller market capitalizations have done so well in recent years is that they're considered the most likely targets. Many LBO screens cut off companies whose market value is thought to be too high to make them buyout fodder.

He then warns investors that a slow-down in private equity could hurt the performance of these stocks, which have been bid up on buyout speculation. The way for investors to avoid this is to remember this mantra: A possible buyout is not a reason to buy a stock. But, by focusing on buying good companies at a large discount to their value, you will probably stumble into quite a few buyouts. For that reason, many of the criteria used to find probable buyout candidates are good criteria for selecting good long-term investments. In my post Finding Smaller Buyout Candidates, I made a list of some of the criteria I use to find cheap stocks that are potential fodder for the buyout industry:

- A stock trading around its liquidation value (this can be calculated by subtracting the a company's total liabilities from its current assets, which Benjamin Graham called a net-net).

- A company with a strong brand that would be a good strategic fit for a larger company.

- A stock trading at a low price/earnings multiple.

- A company without strong anti-takeover provisions.

Interests rates may rise and fall, and leveraged buyouts may wane in popularity and then come back again. But I believe that these criteria will always be helpful for finding undervalued stocks, and undervalued stocks usually outperform.