Say ‘Shalom’ to Opportunities in Israel Stocks

by InvestorPlace Contributor | June 29, 2011 9:30 am

Investors who are willing to set aside their feelings about Middle Eastern politics might want to consider the Israeli stock market.

The Jewish state has weathered the worldwide economic recession surprisingly well. Israel GDP growth rose by 4.7% in the first quarter. The Bank of Israel recently raised its 2011 GDP growth forecast to 5.2%, from an earlier forecast of 4.5%. Unemployment declined to 5.8% in April, according to Israeli government data. While Israel’s economic growth lags the oil-rich countries (Saudi Arabia GDP[1] is expected to gain 6.1% this year), compared with other developing Israel is booming. For instance, The Federal Reserve expects the U.S. economy to expand by 2.7% to 2.9%this year.[2]

Indeed, Israel’s well-educated workforce and well-developed high tech sector has attracted U.S. multinationals for decades. General Electric Co. (NYSE:GE[3]) recently announced plans to open its eighth research and development center in Israel[4].  Intel Corp. (NASDAQ: INTC)[5] opened its first design and development center outside of the United States in Israel in 1974 and now has five locations in the country. Google Inc (NASDAQ: GOOG[6]) and Microsoft Corp. (NASDAQ: MSFT[7]) also have active operations in Israel.

Many of the leading Israeli companies have traded in the U.S. for years. Some appear to present buying opportunities. The MSCI Israel Capped Investable Market Index Fund (NYSE:EIS[8]), which seeks to mimic the performance of the broader Israeli market. It has dropped 11[9]% this year as investors continue to be spooked by the political instability in the Middle East. Some commentators have cautioned investors to avoid the ETF because Teva Pharmaceutical Industries Ltd. (NASDAQ:TEVA[10]), the largest maker of generic drugs, accounts for 21% of the Index and is an international company whose fate is not directly tied to the Israeli economy. Israeli financial services firms account for roughly another 28% of the index.

What’s more, Israel is proof positive of the success emerging markets can have once they “emerge.” Over the last several years, nearly all the major indexes have moved Israel from “emerging market” status to “developed.”

Teva is a screaming buy. Its shares are down about 9% this year amid concerns for a myriad of reasons. Including unjustified worries about its multiple sclerosis drug laquinimod. Bank of America Merrill Lynch analysts recently declared that that sell-off in Teva was overdone and recently reiterated its “buy” rating with a $58 price target, a 20% premium over where the stock recently traded, The price target at Barclays is $70,[11]

Worries about a potential real estate bubble are depressing financial stocks. Their profits, nonetheless, are soaring. First quarter profit at Bank Hapoalim Ltd. (PINK:BKHYY[12]) almost doubled. It plans to resume paying dividends that have been suspended since 2008. Earnings at First International Bank of Israel rose 42% in the quarter.

Israeli officials have said they are taking steps to avoid having a bubble emerge. But you should bank on big growth in this region.

Endnotes:
  1. Saudi Arabia GDP: http://www.emirates247.com/business/saudi-gdp-to-rise-6-1-in-2011-2011-06-15-1.402948
  2. by 2.7% to 2.9%this year.: http://www.bloomberg.com/news/2011-06-24/u-s-economy-grew-1-9-in-first-quarter-above-prior-estimate.html
  3. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  4. plans to open its eighth research and development center in Israel: http://www.globes.co.il/serveen/globes/docview.asp?did=1000653767
  5. INTC): http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC)
  6. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  7. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  8. EIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=EIS
  9. It has dropped 11: http://www.google.com/finance?q=NYSE:EIS
  10. TEVA: http://studio-5.financialcontent.com/investplace/quote?Symbol=TEVA
  11. target at Barclays is $70,: http://www.streetinsider.com/Analyst+Comments/Barclays+Maintains+an+Overweight+on+Teva+Pharma+%28TEVA%29%3B+Detailed+Laquinimod+Results+Support+Our+Positive+View/6424319.html
  12. BKHYY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BKHYY

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