Israel Economics

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James Altrucher: Israel trades on terror discount

By James Altucher
Last Update: 2:27 PM ET Feb 27, 2006

In spite of the Israeli market going up 25 per cent in 2005 there is still a huge "terror discount" baked into stocks trading in the US markets of companies based in Israel.
Economically, Israel is on a sound footing, with Stanley Fischer, former vice-chairman of Citigroup, taking over as the governor of the Bank of Israel this past May. Commenting on a recent IMF report on Israel, Mr Fischer, a former IMF official, said he had seen many of the fund's reports and even represented it from the other side of the table, and that he was "therefore in a position to state that this is one of the fund's best reports".

Israel has an excellent credit rating from all three big ratings agencies, and 2005 was a great year for the Tel Aviv stock exchange. The TA-25, (Ma'of) which is made up of the 25 largest stocks by market capitalisation, climbed 25 per cent.
No discussion about Israel or its economy would be complete without mention of the forthcoming March elections. With Ariel Sharon currently incapacitated, Ehud Olmert has taken the top spot in Kadima. Whether Mr Sharon recovers to lead Kadima or Mr Olmert takes over the reins full time, the polls show Kadima winning over Likud and the Labor party.

As Israel is a strong democracy I do not feel the markets are in jeopardy, regardless of the outcome of the March elections.
With regard to Mr Sharon's illness Mr Fischer noted that Israel has a stable economy in which investors have confidence. The proof, he said, was seen in the "impressive" market which, he said, "spoke of the stability and maturity of the economy". As for Hamas' recent win in the Palestinian elections, there should again be no "real" negative affect on the Israeli economy.

There will be immense pressure on Hamas to disarm or lose funding, and money makes the world go around. Israel is an extremely safe country in spite of reports that might suggest otherwise.

Here are my favourite Israeli companies that trade on the Nasdaq. I don't hold any of them. All are profitable and carry little or no debt loads.

Aladdin Knowledge Systems is a digital security business that provides solutions for digital rights management and internet security. One of their products, eToken, allows users to generate and provide secure storage for passwords, digital certificates, secure strong authentication, digital signing and encryption.
This data security is based on smart cards but requires no special readers.
The company has two headquarters, one in Tel Aviv and another in Arlington Heights, Illinois. It has customers all over the world, including corporations such as ExxonMobil and Adobe, and governmental agencies such as the US Department of Defense. The company has no debt and $73m in cash on the books. Over the past 12 months it has generated $12.5m in operating cash flow.
Check Point Software Technologies is another internet security business. Its products include firewalls and virtual private networks. Based in Ramat-Gan, Israel, and in Redwood City, California, it has been somewhat beaten up over the past year but remains a heavyweight in internet security. With more than $1bn in cash and zero debt, I am confident it will work out a way to expand successfully in the future.

Given Imaging is a healthcare company that has developed innovative imaging technology. Given Imaging's flagship technology is the Given Diagnostic System, featuring the PillCam Capsule Endoscope. It is currently marketed in the US and 60 other countries for visualising the small intestine and has benefited tens of thousands of patients worldwide. This product is ingested and glides naturally through the digestive tract and is naturally excreted.
As it passes through the body it detects abnormalities of the small intestine that can diagnose problems such as Crohn's disease. This is a big breakthrough. The company has more than 260,000 patents worldwide. Given generated $19m in operating cash flow over the past12 months and it has more than $58m in cash and less than $50,000 in debt.

Magal Security Systems (MAGS) is a manufacturer in the field of outdoor perimeter protection worldwide. It provides systems for borders, airports, industrial and military sites, nuclear facilities and other sensitive areas. With today's security concerns, it is only logical to assume the demand for these products will rise. The company recently spiked, so I would wait for a pullback to buy.

Teva Pharmaceutical is the largest manufacturer of generic drugs worldwide. Along with sound financials, it is close to a deal with Ivax that would increase its exposure to the US market. Teva has been increasing revenue year-over-year, recording $5.17bn in sales over the past 12 months. While Teva may not have the upside potential the other companies have, no Israeli index would be complete without it.

Finally, a little quiz: which of these companies has an R&D centre in Israel: Motorola, Intel or Microsoft?
The answer is all three.

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