Can Israel, the site of shrines sacred to Judaism, Christianity and Islam, also become a mecca for international investors?
For years, investors have intermingled with Israel's slowly deregulating economy and herky-jerky stock market. Now, with the signing of the Hebron agreements this week, and a resolution to the Israeli-Palestinian conflict one step closer, investors and analysts who follow the Israeli stock markets are clamoring about the prospects of a peace dividend.
Indeed, in the past several days a rally has already started to unfold. Starting one month ago, partly in anticipation of some kind of Hebron accord, investors started driving the
(comprised of Israel's 100 largest publicly-traded companies on the
Tel-Aviv Stock Exchange
) higher. The measure has now gained 17% during the past month in local currency terms, moving from 205.79 on December 16 to 239.13 on January 16. In recent sessions, the dollar value of the volume has more than tripled from the $15 million-to-$20 million range to more than $60 million.
After three years of a declining stock market, experts say that Israeli stocks have plenty more room to grow. "We are only at the beginning of the move," says Gil Sartena, a managing director with
Oscar Gruss & Co.
in New York.
While slightly less ebullient because of the recent run-up, David Basoco, vice-president of research at
Josephthal Lyon & Ross
still says that "future prospects for
investments in the country are very bright."
American investors can invest in a handful of Israeli American Despositary Receipts, and also more than 80 Israeli companies trade directly on exchanges or markets in the United States.
Adding to the renewed hopes for political stability in the region, the new government of Prime Minister Benjamin Netanyahu has taken steps to streamline the economy by privatizing government-owned businesses and allowing for added competition in several key industries. This past summer his Cabinet approved 17 of 25 reform proposals that the Prime Minister said were key to attracting foreign investors.
Heavyweights in the global financial markets are also showing their approval for the steps being taken. Beginning in April, the International Monetary Fund will raise Israel to its list of industrial nations from its current status as a developing nation.
The closest thing to a pure play on Israel is
(KOR:NYSE), a diversified company with holdings in everything from consumer products to basic industrial manufacturing to high-technology. The conglomerate accounts for about 7% of the country's economy. Over the past couple weeks the stock has neatly mirrored the move in the Mishtanim: It's up 22%, from 17 1/8 on December 17 to 20 1/2 on Thursday, and is closing in on its 52-week high of 21 1/2.
While the political situation is stabilizing, and global investors are becoming more comfortable with Israel, there is still concern about the domestic economic situation. Israel's GDP growth rate has slipped from a high of 7.1% in 1995 to about 4% in 1996. Economists anticipate growth will decline to about 3% in 1997.
Meanwhile, inflation has gained momentum, jumping from 8% in 1995 to 10.5% in 1996, with expectations that it will decrease to the 9-to-10% range for 1997. (Those numbers are way below the runaway inflationary rates of 450% in the early 1980s.)
With the possibility of a tighter economic environment, many experts recommend that investors focus on export-oriented companies. The most closely followed Israeli ADR is
Teva Pharmaceutical Industries
(TEVIY:Nasdaq) which derives close to 60% of its revenue from sales of its proprietary and generic drugs outside Israel. Since the FDA approved Copaxone, the company's new drug for treatment of multiple sclerosis, Teva has surged 20% to 54 1/4.
And many analysts think Teva can run still further. Kenneth R. Nover, an analyst with
, anticipates that the stock will hit 70 within the next 12-18 months, and David Saks of
Gruntal & Co.
expects 80 within two years. Saks says that worldwide sales of Copaxone should be $150 million in 1997 and double to $300 million by 1999. Neither firm has recently led a Teva underwriting.
Meanwhile, if you're worried that the peace negotiations will turn sour, Teva is likely to withstand any difficulties. You "see some reaction based on
peace headlines, but over time
Teva will run on its own fundamentals," says Nover.
For those who prefer more glamorous--and risky--high-tech start-up companies, Israel has gained a reputation as the Silicon Valley of the Middle East. The country's engineers and scientists have been at the forefront of many cutting-edge technologies.
(MOT: NYSE) both have production plants in the country, and Intel actually developed its new Pentium MMX chip at its Haifa research site.
One of the country's best kept stock secrets is
(ORBKF:Nasdaq), which has 75% of the global market for printed circuit-board inspection equipment. Despite their dominance of a growing industry, they are trading at a mouth-watering 11 times trailing earnings. Analysts commonly mislabel the company as a semiconductor equipment manufacturer that is susceptible to downturns in that market, says Basoco. However, Orbotech products are actually shielded from a downturn in the semiconductor industry since thinner margins mean manufacturers are more inclined to adopt their inspection devices to lower the number of defective boards that must be thrown out.
The blue-chip stock among Israel's high-tech community,
(ECILF:Nasdaq), is also attractively valued. Even though the company is well-followed, its broad telecommunications product line makes it difficult for investors to value and therefore remains grossly undervalued, says Basoco. ECI is trading at only 14 times its
consensus estimates for 1997, for which it's expected growth rate is 25%. Meanwhile,
(CSCC:Nasdaq), which competes with ECI in the ATM switch market, is trading at 88 times trailing earnings with expected earnings per share growth of 40-60% annually in the next two years. Basoco calls ECI his top pick for 1997 and has a twelve-month price target of 30-32. The stock closed Friday at 24.
The path is not smooth for every Israeli company.
(SCIXF:Nasdaq), the world leader in electronic pre-press, has watched desktop publishing slowly siphon away its core business. As the power of personal computers has increased dramatically, it's become possible to print publications and visual documents without using Scitex hardware and software. "Desktop publishing has undermined their profitability," says Basoco. The stock has fallen from 43 1/2 in December 1992 to 11 11/16 and is being held up by rumors that it might get taken over, adds Basoco.
Another former high-flyer in the printing industry is
(INDGF:Nasdaq), which has cratered from 64 3/4 in July 1995 to 7 3/8 because it also could not stay cost-competitive with the cheaper desktop publishing menace.
By Avi Stieglitz