Israel: Beyond the Risk, Opportunities Beckon

by Alyssa Oursler | August 10, 2012 9:00 am

Israel is often described as an island of democracy in a sea of conflict. And between the ongoing Israeli/Palestine division[1], recent attacks in neighboring Egypt[2] and threats from both Iran and Syria[3], it’s hard not to think of conflict when you think of Israel.

The problem (well, besides the conflicts themselves) is that those headline quarrels can overshadow something else the country has to offer: investment opportunity.

Here are a few things you might not know about Israel:

And that’s just the big picture. Despite its risk and conflict, the country has been booming, and could be a great option if you’re looking to dive into a new market. So, how do you play Israel? Here are some options:

Technology

Israel isn’t just an island of democracy — it’s also a hub of innovation. It has the most start-ups per capita in the world[7], and it has 60 companies trading on the Nasdaq, more than any country except the U.S. Some of those companies include Mellanox Technologies (NASDAQ:MLNX[8]) and Checkpoint Software Technologies (NASDAQ:CHKP[9]).

Mellanox, for one, has exploded in the last year[10], more than quadrupling in share price. The fabless semiconductor company has seen 12 consecutive quarters of revenue growth, and sales for this year are expected to be five times what they were in 2007. Shares soared 44% to a new high on the heels of its Q2 earnings reports and have seen even more gains since then. The company now boasts a market cap of around $4.5 billion.

If Mellanox’s boom doesn’t speak to the growth potential hidden in Israel, I’m not sure what does.

Sure, MLNX has a P/E ratio over 80, which means that stock may actually be a little overbought. But at the same time, Mellanox could have the growth to justify such a number.

A new Intel (NASDAQ:INTC[11]) server and the growing popularity of cloud computing should continue to mean increased demand[12] for this company, and big names like IBM (NYSE:IBM[13]), Hewlett-Packard (NYSE:HPQ[14]), Dell (NASDAQ:DELL[15]) and Oracle (NASDAQ:ORCL[16]) are some of its customers.

But it doesn’t end there. Checkpoint Software Technologies is the No. 2 software security firm in the world, although its stock has dropped off recently after years of steady gains. After hitting a low in early July, the stock is up more than 12% in the past month and could be poised to for another upward trend.

Moving away from the Nasdaq, there’s also Vringo (NYSE:VRNG[17]), the video ringtone company. This start-up has been on the patent prowl[18] of late. Most recently, it sold off stock to fund a $22 million deal that gave it 500 patents from Nokia (NYSE:NOK[19]). Plus, it merged with intellectual-property firm Innovate/Protect last year, which had filed patent suits against other big names like AOL (NYSE:AOL[20]), Google (NASDAQ:GOOG[21]), Gannett (NYSE:GCI[22]) and Target (NYSE:TGT[23]).

All that action should help the company keep growing. This small cap has already seen lots of gains, as shares are up over 280% since 2012 kicked off.

Yeah, I think you get the point. Next sector. . .

Pharma

When it comes to pharma stocks in Israel, one name does the trick: Teva Pharmaceuticals (NYSE:TEVA[24]). Although shares of TEVA are essentially flat year-to-date, thanks to a rough May, during which beginning-of-the-year gains were completely erased. But forget about that, and listen to this: Teva is the largest generic-drug company in the world. And one of the top 20 pharmas overall.

That’s a pretty good place to be right now, especially considering that generics (which made up more than half of the company’s sales last year) seem to be the future.

A recent report shows that generic-drug versions captured 80% of a brand’s volume[25] within six months of patent loss in 2010 — and that pace and market share have grown since then. In 2011, generics made up 80% of prescription drug sales[26] in the U.S., with sales increasing $5.6 billion from the year before. Simply put, generics bring in big business.

Teva’s sales have proven this: The company has enjoyed 14 consecutive quarters of revenue growth, although it missed estimates slightly in Q2. And its earnings have increased year-over-year so far in 2012, while meeting analyst estimates.

On top of that, it looks like a pretty good deal: Teva has a P/E just over 11, compared to Merck’s (NYSE:MRK[27]) P/E over 20 and GlaxoSmithKlein’s (NYSE:GSK[28]) P/E around 15. The only red flag of late would be that it’s currently undergoing a bribery investigation[29] — but that seems to be common practice recently. Pfizer (NYSE:PFE[30]), Roche (PINK:RHHBY[31]) and Glaxo have all faced similar problems[32].

And to top it off, Teva hands out a solid dividend that it’s been paying since 1984; it has a current yield of 2.45%. All-in-all, this stock looks anything but generic.

Large Israel ETF

If you like the idea of Teva, or of Israel in general, another option would be to buy into an ETF, namely, the iShares MSCI Israel Capped Index (NYSE:EIS[33]). Teva is actually its biggest holding at around 23%, while Mellanox comes in at just under 4%.

The ETF also gives investors exposure to stocks that they usually wouldn’t be able to make bets on because they’re not traded on a U.S. exchange. Israel Chemicals, The Israel Corp and Israel Discount Bank are just a few plays, all traded on the Tel Aviv Stock Exchange, that are in EIS.

InvestorPlace writer Jonathan Berr[34] talked about the potential of this fund back in March, saying it was a great option if you’ve got nerve[35] — and it was up around 5% at the time. Since then, though, it’s dropped some and is no longer in the black for the year.

But Berr’s thesis still holds true. If you have the nerve, this fund still has the potential. And in the past month, things have been working their way back up, so it could still be a promising pick. Plus, it’s at a low price thanks to its recent drop — considering all Israel has to offer.

The Bottom Line

So if you’re looking for a new region to explore and invest in, Israel may be just it. But that’s not to say you shouldn’t proceed with caution.

The country’s latest discovery nicely sums up what it has to offer. Last December, offshore natural gas deposits[36] were found — a 150-year supply that could lead to Israel’s energy independence or even energy exports. But such a promising find also comes with caveats: The country’s location could mean that such an asset is actually a security threat, and Israeli regulations could deter investors.

As with its natural gas goldmine, the country has lots of potential, but potential that is surrounded by risk.

So, whether you go with a promising company or hedge your bet with an ETF, recognize the uncertainty with Israel. Even its booming economy may slow down: GDP is expected to expand by just over 3% in 2012, for example, as opposed to the 5% rate it registered last year.

But if you do decide to take a chance and try something new, Israel remains a land of opportunity. You just might be rewarded.

As of writing this, Alyssa Oursler did not own a position in any of the aforementioned securities.

Endnotes:
  1. Israeli/Palestine division: http://opinionator.blogs.nytimes.com/2012/08/07/the-elephant-in-the-map-room/
  2. recent attacks in neighboring Egypt: http://www.nytimes.com/2012/08/07/world/middleeast/sinai-attack-a-wake-up-call-to-egypt-israel-says.html?ref=israel
  3. both Iran and Syria: http://www.reuters.com/article/2012/08/05/us-arms-israel-missiledefence-idUSBRE87401P20120805
  4. in the last 20 years: http://www.israelinvestmentadvisors.com/israel-real-gdp-growth-rates/
  5. expanded just under 5%: http://www.bloomberg.com/news/2012-02-29/netanyahu-sees-israel-beating-developed-economies-amid-iran-nuclear-threat.html
  6. better risk-adjusted returns: http://www.bloomberg.com/news/2012-02-19/israel-safest-as-stock-investors-discount-threat-of-war.html
  7. most start-ups per capita in the world: http://www.nytimes.com/2010/01/12/opinion/12brooks.html
  8. MLNX: http://studio-5.financialcontent.com/investplace/quote?Symbol=MLNX
  9. CHKP: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHKP
  10. exploded in the last year: http://investorplace.com/2012/07/sizzling-small-caps-can-they-keep-it-up/
  11. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC
  12. continue to mean increased demand: http://online.wsj.com/article/BT-CO-20120719-711143.html
  13. IBM: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBM
  14. HPQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HPQ
  15. DELL: http://studio-5.financialcontent.com/investplace/quote?Symbol=DELL
  16. ORCL: http://studio-5.financialcontent.com/investplace/quote?Symbol=ORCL
  17. VRNG: http://studio-5.financialcontent.com/investplace/quote?Symbol=VRNG
  18. on the patent prowl: http://online.wsj.com/article/BT-CO-20120809-711134.html
  19. NOK: http://studio-5.financialcontent.com/investplace/quote?Symbol=NOK
  20. AOL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AOL
  21. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  22. GCI: http://studio-5.financialcontent.com/investplace/quote?Symbol=GCI
  23. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  24. TEVA: http://studio-5.financialcontent.com/investplace/quote?Symbol=TEVA
  25. 80% of a brand’s volume: http://www.imshealth.com/deployedfiles/imshealth/Global/Content/IMS%20Institute/Static%20File/IHII_UseOfMed_report.pdf
  26. 80% of prescription drug sales: http://www.imshealth.com/ims/Global/Content/Insights/IMS%20Institute%20for%20Healthcare%20Informatics/IHII_Medicines_in_U.S_Report_2011.pdf
  27. MRK: http://studio-5.financialcontent.com/investplace/quote?Symbol=MRK
  28. GSK: http://studio-5.financialcontent.com/investplace/quote?Symbol=GSK
  29. undergoing a bribery investigation: http://www.boston.com/business/news/2012/08/06/teva-pharma-discloses-sec-bribery-investigation/uOupYO8OqrXUZ9Y7Mk3opL/story.html
  30. PFE: http://studio-5.financialcontent.com/investplace/quote?Symbol=PFE
  31. RHHBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=RHHBY
  32. faced similar problems: http://www.dailymail.co.uk/debate/article-2171845/Big-Pharma-big-trouble--be.html
  33. EIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=EIS
  34. Jonathan Berr: http://investorplace.com/author/jonathan-berr/
  35. a great option if you’ve got nerve: http://investorplace.com/2012/03/got-nerve-israel-has-plenty-to-offer/
  36. offshore natural gas deposits: http://www.bloomberg.com/news/2012-08-02/israel-finds-240-billion-gas-hoard-stranded-by-politics-energy.html

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