HomeJuly 2012Investing in Israel

Investing in Israel

For some people Zionism means moving to Israel.  For others it means paying a visit to the trees one planted there or making donations to support Israel in some way.
Now there is “modern-day Zionism,” the opportunity to promote the fact that Israel is a leader in making the world a better place and to invest in the many forms of technology Israel offers.  “If people are Israel-centric, they need to know our story and the techniques for investing in it,” explained Matt Bernstein, director of planned giving for the Jewish National Fund (JNF), who spoke at a JNF event about investing in Israel in Costa Mesa in May.
According to David Lang, one of the co-chairs of JNF in Orange County, “To ensure the growth of Israel, we decided to reach out to the Jewish business community and pique their interest in the opportunities there.”  Lang, co-chair Dan Koblin and Bernstein came up with the idea to talk about JNF’s 1,100 economic and community development, conservation and ecology projects across Israel and to link experts on Israeli business and technology with potential investors.
Marshall Kaplan, who runs a nonprofit organization called Pathways to Opportunity, said that the Merage Foundation now brings representatives of 45 Israeli startup corporations to Orange County each year to teach the Israelis “elevator pitches” to present their high-technology products to people who might want to invest in them.  Kaplan said that Dan Senor’s book, Israel as a Startup Nation, is in creating interest in Israel’s high-tech sector what Leon Uris’s Exodus was in selling Israel bonds.
“How can Israel with only 7.1 million people and limited resources have so many startups and patents?” Kaplan asked rhetorically.  “According to Senor, it’s not just Jewish exceptionalism.”
Israel has achieved so much, he explained, because:

1    Israel is an island unto itself.  It has to survive, innovate, be aggressive, question, challenge, improvise, put value on time and experiment with human versus natural resources to foster a spirit of entrepreneurialism.

2    Israelis want to win; Americans want to compromise.

3    The Israeli Defense Forces provide the acculturation point for Israelis, stimulating innovation, creativity and leadership.

4    Immigrants, including Russian engineers, are risk takers.

5    There is more acceptance of the government’s role in the economy.

6    There is more brain circulation as Israelis go to the U.S. and network with American firms.

7    There is cluster development as companies join together in the same space and breed other companies and relationships.

Still, there are problems, Kaplan said.  There is youth cynicism toward the government, problems with economic growth stemming from the fact that only 55 percent of the people who could be in the labor market are in it, the pervasive gloom of the Iran threat, the concern about the continuation of U.S. funding, changes venture capital demands and Palestinian issues.
“In summary, Israel is a great place to invest,” Kaplan said.  “Sectors well poised for growth are natural gas, agriculture especially irrigation, clean technology, medicine, biotechnology and computers.”
The keynote speaker, Consul General David Siegel, related that he had grown up in the heart of a JNF forest.  “The dangers will always be there, but Israel will not be judged by the dangers.  It will be judged by its ability to create a vibrant society in spite of the challenges.  It will be done with will, technology and a strong partnership with the U.S.”
Siegel added that, “People tend to look at things through the headlines and forget to look at the back story.  Israel is not the cause of problems in the Middle East but the cure.”
Consul General Siegel related that there are more than 200 high-tech and R&D companies with technologies derived from Israel, as well as major agreements between American and Israeli universities.  “In 64 years Israel has gone from a stateless nation to a startup nation,” he said.  “When we look at where we are today and where we’re going, it’s very exciting.”
Siegel mentioned an important JNF initiative that is emphasizing the positive as part of the “new Zionism” approach.  “Positively Israel,” developed by JNF’s lay and professional leaders, emphasizes that “It’s not even the same reality as 10 years ago,” according to Russell Robinson, CEO of JNF.  “There are no more Jews in exile.  Any Jew can move to Israel.  We won.  The Israel/Disapora relationship is about winning Israel.”
The message, on 57 college campuses and elsewhere, is “Israel is a winner.  Israel is making the world a better place,” Robinson said.  He wants every Jewish organization to be part of spreading the message.  JNF produced 50,000 door hangers that are being used at the UN Summit about Climate Change, in dormitories, in shopping centers and in other places.  JNF is also taking sports celebrities and other luminaries to Israel, so that they can see if for themselves.
“We don’t talk about the conflicts,” Robinson added.  “Sadly, many negative perceptions come from within our own community, and people are tired of hearing about it.  Instead, we’re talking about the great strides Israel has made in making the world a better place.  If you care about the cell phone, medical inventions, drip irrigation and other state-of the-art technology, know that Israel is doing the work.  It’s our job to get the word out.”

Did You Know?

•    Israel sent 120 physicians to the tsunami-stricken areas of Asia in 2004, as well as 82 tons of medical equipment and humanitarian aid.
•    Drip irrigation is an Israeli invention that accounts for significant water conservation all over the world.
•     Israel developed astounding hydrological methods that enable crops to grow in the most arid areas.
•     The cell phone was developed in Israel.
•     Israel designed the airline industry’s most impenetrable flight security systems. US officials now look to Israel for advice on how to handle airborne security threats.
•     ReWalk, the first commercially viable upright walking assistance tool, which enables paraplegics to stand, walk, and climb stairs, was created and developed in Israel.
•     Israeli scientists developed the first fully computerized, no-radiation diagnostic instrument for breast cancer.

(Source: www.jnf.org/positivelyisrael/)

Investing in Israel
By Bill Gunderson

Believe it or not, Israel has more publicly traded companies listed on the NASDAQ  than any other country except the United States and Canada. Currently, Israel has about 60 stocks listed on the exchange. Not bad for a country with a population of just over 7.6 million!
An economy that was once based primarily on clothing, agriculture, and a few other industries has almost miraculously transformed into a high-tech, highly developed one.
Israel is no longer considered an emerging market, but is now a member of the 24 country MSCI developed market index.
Unlike the United States and Europe, the banking industry in Israel has remained stable, and far exceeds the current Basel Standards of Europe. At the same time, Israel’s high-tech industry is booming. There are a lot of different means by which an investor can either invest in the equity or bond market of Israel. This month we will take a look at one of my favorite Israeli stocks.
I am not a fan at all of index funds, but let’s begin by taking a look at an exchange traded fund (EIS) that has been designed to track the Israel Capped Marketable Index:
The overall index has badly underperformed the U. S. stock market. The index has a heavy weighting in Teva Pharmaceuticals (TEVA) of almost 25%, so it is not a real good representation of some of the great stocks that are headquartered in Israel.
Teva gets its heavy weighting in the index because it is an almost $34 billion dollar company. This generic drug maker is by far the largest publicly traded company in Israel.
The performance of Teva over the last one to three years has not been very good.  When I compare Teva against almost 2,800 other stocks based on a performance and valuation basis, it only comes up with an overall grade of B- and an overall ranking of 1,165. I like to buy stocks that have a grade of A- or better, or are ranked within my top 200 stocks.
I am also not a fan of Mutual Funds. There is a closed-end managed fund on Israel, called the Aberdeen Israel Fund (ISL). The recent performance has not been very good, however.

While it has a good 10 year track record, it has badly trailed the U. S. market over the last three years. It should also be noted that this fund was down a whopping 54.9% during the global financial crisis of 2008.
I am a fan of individual stocks that have outperformed the indexes by a wide margin and still offer decent value, however. Do any such stocks exist in the market today? Actually, one of the twenty-five stocks that I own in the aggressive portfolios that I manage holds a stock based in Israel. By the way, as of June 8 this portfolio was up 14.1% year-to-date, while the S&P 500 is up just 5.1%.
This portfolio is made up of superior growth companies like Allot Technologies (ALLT). The company has a market cap of $809 million (small-cap) and is a provider of network optimization products for service providers to manage network traffic and internet access.
Allot has been growing its revenues at an average clip of about 35% per year over the last four quarters. In addition to this, its earnings have grown by 233%, 160%, 100%, and 88%, respectively over the last four quarters. This spectacular growth has translated into some very good stock performance.
Data from Best Stocks Now App

There is a very strong correlation between earnings growth and stock price appreciation. As you can see, the company’s spectacular growth has been accompanied by some very heady returns for Allot’s investors. The stock has delivered an average return of 30.9% over the last five years! By contrast, the S&P 500 has been negative during this same period of time.
The stock has delivered an astonishing average return of 107.4% per year over the last three years, and is up 87.2% in the last twelve months. This is a very aggressive growth stock however. It is not suited in a portfolio that is not well diversified. Nor is it suited for moderate to conservative investors. As I stated earlier, it is just one of 25 equally weighted positions in the aggressive accounts that I manage.
What about valuation? We should all know by now that valuation really does matter. We found out how important valuation was during the tech crash of 2000-2002. We also found out how important valuation was during the real estate bubble that eventually popped.
Let’s take a look at the current valuation of Allot. Valuation of a stock is not measured by the price of its shares. Instead it is measured by how much we have to pay for the sales, earnings, assets, and cash-flow of a company. I like to look at forward PE ratios and compare them with the anticipated growth rate of the company.
In the case of Allot, it is currently trading at about 34 times next year’s earning with a projected five-year growth rate of about 24% per year. This makes for a PEG ratio of 1.43. I like to buy stocks that have a PEG ratio that is closer to 1.0. This stock is up over $5.00 per share in the last three weeks however, and it is currently a bit pricey.
However, when I take next year’s earnings estimate of $0.77 and extrapolate it out over five years at 24% per year, and apply a reasonable multiple, I come up with a five year target price of $47 on the shares. I know that this all probably sounds really technical, but it’s really just sixth grade math.
I like to buy stocks that have 80-100% upside potential over the next five years. Allot is currently at the lower end of this range, but I have no intention of selling my shares. Here is what the valuation looks like:
As long as Allot remains in my top 200, I will hold the stock. Hopefully, that will be for a long time. It currently gets a grade of A in my grading system and is ranked number 50 overall.

Bill Gunderson is the President of Gunderson Capital Mgt. in San Diego, CA. He is the host of a daily radio show “Best Stocks Now” which is heard in San Diego, Seattle, and St.Paul-Minneapolis. He also publishes a weekly newsletter and is the inventor of the Best Stocks Now app. Bill is also a regular guest on the Fox Business Channel and Bloomberg. He is also a regular columnist for TheStreet.com, MarketWatch.com, and Seeking alpha.com and has been published in newspapers and magazines all across America.
You can contact Bill, or get a free four week trial to his newsletter by visiting www.pwstreet.com.


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