Trillion-dollar hedge fund BlackRock ( BLK) has been quietly amassing shares of the Israel-based security software maker Aladdin ( ALDN), reaching a 13.5% ownership stake during the third quarter.

While such a move hardly inches the dial at a colossal fund, for the average investor, BlackRock stock picks are often seen as buy signals.

However, traders have yet to fully embrace the stock, which has slowly started to recover lost ground after tumbling from nearly $24 to below $14 in a two-month period. The stock closed Thursday at $17.61.

Aladdin, which is considered a market leader in the software digital rights management (DRM) industry, makes software products and UBS security tokens that prevent unauthorized use of software, and protect copyrights and intellectual property.

Over the past few quarters, the company's revenue sank as sales of its major DRM operation slowed and a secondary offering tanked. Many analysts claim an unstable management is a big part of the reason for slowing sales rather than a slowdown in demand -- a perception which could indicate that BlackRock intends to intervene with a possible management shakeup.

Early in 2005, the company conducted a secondary offering of 2 million shares at about $21 each. A number of institutional investors, including Fidelity Management & Research and Tracer Capital Management took significant interests, hoping perhaps for a rapid growth opportunity. But the security failed to rise to the expectations.

Ronen Zeharia, fund manager at Meitav, an Israeli asset management firm, speculates that the steep decline in Aladdin shares since May is a result of disappointed investors dumping the stock after it climbed back to its secondary issuing price.

"I think the security is trading at a decent multiple of 14.6 times its 2006 earnings," said Zeharia, who recently bought shares at $14. "In terms of earnings per share, the average estimates are showing a nice growth of about 15% in 2007 -- but I wouldn't storm the stock."

The stock was recently trading at 17 times 2005 earnings, compared with an industry average of about 40.

Ehud Eisenstein, analyst at Oscar Gruss, isn't comfortable with the company's revenue growth, and is concerned that recent employee turnover has had a crippling effect on sales. "From a high double-digit sales growth in the first half of last year, Aladdin's sales weakened to low-single-digit growth this year," Eisenstein said. "I can attribute much of this to the fact that 80 out of 240 employees in Israel have been replaced over the last year."

He also mentions that Aladdin's OEM and licensing agreements with large tech shops including VeriSign ( VRSN)and RSA Security were discontinued, or changed in a way that made them "insignificant to the bottom line."

Behind the scenes, however, industry sources say Aladdin's two founding brothers, Yanki and Dany Margalit, who have been tightly controlling the business, are slowly phasing out, letting a new managerial tier slowly take over the helm. This move is usually one that investors like to see.

"Founders tend to be over possessive about their companies and in many cases get criticized for delaying the company's growth because they reject mergers or acquisition opportunities," said one analyst who requested anonymity.

He said two other examples of Israeli security software firms getting scrutiny for being tightly held by their founders are Check Point ( CHKP), which many believe should be acquired but probably won't be as long as founder Gil Shwed is at the helm, and Radware ( RDWR), owned by two brothers, Zohar and Yehuda Zisaple.

At Aladdin, management changes, both apparent and subtle, and the significant new ownership by BlackRock, could help improve its performance. UBS analyst Dino Diana recently initiated coverage with a buy recommendation and a $21 price target, noting that "in light of the recent sales management changes... we believe Aladdin represents a solid buying opportunity for investors with a 12-month or longer time horizon."

Of course, getting a decent boost in sales based on external market circumstances is always a blessing.

Over the past few days Aladdin said that Microsoft's ( MSFT) enhanced antipiracy measures, slated for its Windows Vista operating system, will help increase developers' awareness to the importance of fighting unlicensed and pirated copies of their software.

On another front, Aladdin believes that Google's ( GOOG) recent launching of the Google Code Search, which is a tool that can find software bugs, password information and even proprietary code, will accelerate the need for Aladdin's software protection products as this tool "provides a mix of both convenience and a potential threat," Aladdin said in a press release.

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