With the Passover holiday right around the corner, did you know that the Holy Land not only has extraordinary spiritual significance, it’s a powerhouse economy as well?
Despite being located in one of the most geopolitically volatile regions in the world, Israel maintains strong growth in gross domestic product and has an unemployment rate of only 5%.
Furthermore, according to Israel’s Ministry of Economy, it has the “highest concentration of engineers and PhDs per capita in the world.” Such favorable fundamentals are among the many reasons why Israeli stocks could be a big hit for the rest of this year.
Compared to the U.S. markets, Israeli stocks are still trading at reasonable levels. For example, the blue-chip exchange-traded fund SPDR S&P 500 (SPY) just recently closed at a record high for 2016. It’s now about 2% from hitting its all-time high of $213.78, set on May 20 of last year. However, there’s still lingering questions as to whether this rally is sustainable.
On the other hand, the iShares MSCI Israel (EIS) is up less than 1% year-to-date. It’s also outside 10% of its closing record, set last August.
One unique attribute about Israeli stocks is that they eschew long-term liabilities in favor of sustainable growth. Among the top 10 publicly traded companies in Israel by market capitalization, exactly half of them feature no debt on their balance sheets. Compare that to the top 10 American companies, where that ratio is 0%.
While that means that many Israeli stocks forfeit the chance of crazy valuation spurts, it also limits their exposure to the whims of capital markets. True to Jewish traditions, Israeli stocks are generally the lenders, not the borrowers!
In the spirit of the Passover season, Israeli stocks are supported by an underlying economic system that is arguably more stable than its Western counterparts. Thus, they are more likely to better absorb bearish markets.
This was demonstrated most conspicuously during the 2008 global financial crisis. While Israeli stocks were certainly affected by the broad downturn, the country had less exposure to complex financial instruments and maintained a healthy fiscal surplus. The end result spared Israel the brunt of the financial crisis.
As the U.S. markets slug forward under a mixed earnings season, the stability and potential of Israeli stocks may be the best solution for investors.
Top Israeli Stocks at Passover: Check Point Software Technologies Ltd. (CHKP)
Cybersecurity is too big of an industry to miss, which should bode very well for information technology firm Check Point Software Technologies Ltd. (CHKP). Over the past decade, the U.S. government alone spent roughly $100 billion on cybersecurity solutions. Embarrassing data breaches have negatively impacted well-known companies like Home Depot Inc (HD) and Target Corporation (TGT). These and other developments play perfectly into the hands of CHKP, which has been at the forefront of IT security since 1993.
As an investment, the stats on CHKP are compelling. Since 2010, annual revenue has grown an average of more than 10%. In addition, CHKP has some of the highest profitability margins in the IT security industry. This is evidenced by Check Point’s annual earnings per share growth, which clocks in at 10%.
Similar to many Israeli stocks, CHKP has no debt on its balance sheet. The company also maintains consistently strong free cash flow.
From a technical viewpoint, CHKP has admittedly run into choppy waters. However, the IT firm is up 4% year-to-date, despite taking a 3% hit in the markets yesterday when it released its earnings results for the first quarter of fiscal year 2016. Although CHKP provided an earnings beat, Wall Street didn’t take kindly to its cautious tone for Q2.
But in the long run, CHKP is significantly more stable than its rivals. That could really become meaningful if the broad markets fail to spark confidence for the rest of this year.
One thing is clear — cyber criminals won’t miss an opportunity to exploit network weaknesses. Due to its strong position in a growing industry, CHKP has more upside potential than downside.
Top Israeli Stocks at Passover: Mobileye NV (MBLY)
It has been quite an interesting few weeks for technology firm Mobileye (MBLY). The leader in driver assistance systems — industry term for self-driving cars — received a big boost in the markets last month after a significant development in the automotive industry.
On March 17, the U.S. National Highway Traffic Safety Administration announced that major automakers have voluntarily committed to make automated emergency braking a standard feature on almost all U.S. vehicles by 2022. Needless to say, the potential increase in consumer base for MBLY is huge.
In fact, MBLY has one of the better bullish arguments among stocks in the self-driving sector. The company claims that millions of cars have already incorporated its automation program. The MBLY system is also compatible with BMW luxury cars, as well as vehicles produced by Tesla Motors Inc (TSLA), General Motors Company (GM) and Honda Motor Co Ltd (ADR) (HMC).
More importantly, its system can be installed on already existing car models. If rumors pan out and Apple Inc. (AAPL) joins the self-driving fray, MBLY can probably add another important customer to its growing list.
Where MBLY loses some investors is in its financials. Although revenue and earnings in FY2015 jumped substantially from the prior year, the overall performance has been somewhat shaky. For example, net income was negative in three of the past five years.
There are also rumblings by some analysts that MBLY is too tethered to its relationship with Tesla. A fallout there could mean troubling times ahead.
However, MBLY is not a one-trick pony. Don’t miss an opportunity to get on board a company leading a technological revolution.
Top Israeli Stocks at Passover: Israel Chemicals Ltd. (ICL)
Among Israeli stocks, agricultural resource provider Israel Chemicals Ltd. (ICL) has arguably the greatest fundamental challenge heading into the Passover holiday. Despite the fact that ICL is one of the biggest suppliers of potash to the Chinese, Indian and European markets, the company lost over 42% of its equity value last year. Weakness globally for potash prices have not only pressured ICL, its competitors Potash Corporation of Saskatchewan (USA) (POT) and Intrepid Potash, Inc. (IPI) have seen even worse damage.
On the other hand, efforts by ICL to move forward under difficult circumstances appears to be winning supporters on Wall Street. In mid-March, the company announced that it will reduce capital expenditures and cut overhead for the remainder of this year by an additional $50 million. Since that announcement, ICL stock is up more than 9%. Even more surprising for investors is that ICL has cleared 21% YTD.
Could a comeback rally take Israel Chemicals to the Promised Land?
Unlike several other Israeli stocks, ICL has considerably expanded its debt exposure relative to its on-hand cash — oy vey! However, ICL has mitigated some of the damage from declining revenues by controlling its costs. As a result, ICL has very favorable profitability margins relative to its industry.
Further, potash stocks broadly are experiencing a surge in the markets this month. This suggests that a rising tide may lift all boats.
Because of the potash volatility last year, ICL is the most speculative of the Passover bets featured on this list. Nevertheless, momentum could be Israel Chemicals’ best friend.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.