"Some Americans have come to the Middle East looking for oil. We came to the Middle East looking for brains, and we stopped at Israel." -- Warren Buffet, September 2006
I am a huge fan of Israel as a source of great growth-stock ideas -- at a reasonable price, no less. I have been investing in Israeli tech stocks since the mid-1990s, and with great success. The country never fails to produce a steady flow of new ideas, technical talent and high-growth companies. For a variety of reasons, high-growth Israeli companies usually garner a lower multiple than do their Silicon Valley brethren, making the region a dream for managers focusing on companies with growth at a reasonable price (GARP). How has the "Start-Up Nation" been doing lately?
In order to answer that question, I attended a recent dinner here in Los Angeles sponsored by OurCrowd, a new crowd-sourcing venture-capital site that's funding the next generation of hot Israeli startups. OurCrowd was founded by Jonathan Medved -- a prominent Israeli VC who coined the term "Start Up Nation," and is featured in the book of the same name. Speaking in LA was OurCrowd partner Elan Zivotofsky, a veteran investor in Israeli tech companies. Elan has covered Israeli tech as both a sell-side analyst for Goldman Sachs, and on the buy side at several highly regarded funds. He is considered an axe on the space.
Elan started by pointing out that the country has an incredibly solid infrastructure for producing bright minds that can build high-tech companies. A variety of sources confirm that Israel has institutions and the high spending in research and development that lead to innovation. Consider where Israel ranks: No. 1 in the world in medical-device patents per capita; No. 3 in the world for total patents per capita; third most scientific papers per capita in the world; and No. 2 in the world in public expenditure on education.
Also important to note is that Israel is home to R&D offices for all of the major tech companies, producing a steady stream of highly experienced experts that can then provide the talent needed for successful startups.
In addition, the country attracts a high level of venture capital -- most recently, it saw $2 billion in new funding rounds.
In an environment like this, it pays to examine the opportunities already out and growing in the public markets. I ran a screen of Israeli companies traded in the U.S. market with market capitalization of $10 million or higher (the region does skew toward small-cap). The table below is a great starting point for your research into high-growth Israeli names.
A couple of items stand out. Naturally, the list is heavy with technology names, which should not be surprising. Beyond the attractive infrastructure about which Elan elaborated, consider geography. With a tiny domestic market, "domestic-only" types of companies will rapidly run out of room to grow. Home-grown companies must export to get large, and technology products have an instant global market with little in the way of cultural barriers. Having said that, there are a handful of consumer-type names that have managed to create global brands and can be found in the table.
Several names caught my attention for the combination of high near-term growth and low valuation. These are highlighted and include: defense systems vendor Elbit Systems (ESLT), medical-device pioneer Given Imaging (GIVN), Internet-media leader Perion Network (PERI), and telecom name Partner Communications (PTNR). These are joined by a roster of high-growth names with reasonable -- although not low -- valuations. Any investor interested in exposure to Israel should be able to get comfortable with more than a handful of the names in this table.