Israeli Shares to Nab on a Tumble

 | Nov 26, 2012 | 10:00 AM EST  | Comments
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Stock quotes in this article:

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teva

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forty

While the Middle East is brimming with uncertainty, one thing is for sure: If either Israel of the U.S. gets into armed hostilities with Iran, Israeli stocks will take a tumble.

123 Israeli stocks trade on U.S. exchanges, and about 50 of them actively so. A few of these look mildly attractive to me at current prices -- but, if they lurch downward, these stocks will become bargains for longer-term investors.

One that intrigues me is SodaStream (SODA), which makes devices that allow people to turn ordinary tap water into carbonated water at home. I have one, and I find the bubbly water refreshing and cheap, as compared with store-bought soda.

SodaStream, based in Lod, Israel, has increased its earnings each year since 2008. (It went public in 2010.) Analysts are looking for earnings to rise 47% for 2012 and 25% next year.

At about $36, the stock sells for 18x earnings -- which seems fair, but doesn't excite me. If the stock got knocked down to below $30, I would be much more interested.

By far the most sizable Israeli name is Teva (TEVA), the world's largest generic drugmaker. The company takes in about $20 billion in annual sales, and earnings have been growing at better than a 20% clip in recent years.

I figure the growth rate will slow down to 15% as the company matures further, especially since board chairman Philip Frost has said Teva will pursue fewer large acquisitions in the next few years.  

Teva stock currently sells for 16x earnings, and I consider it fairly valued at that level. At 13x earnings or less, I would deem it a bargain. If Teva should drop to $31.85 or less during any Iran hostilities, I believe that would be an excellent buy point.

A riskier play would be Formula Systems (FORTY), a small software company whose sales and earnings have been on an upswing lately. The stock trades below book value, and at 10x earnings.

The problem is that these American depositary receipts don't trade every day. So far in November, they've seen three days without trades. If adverse developments arise that threaten Formula Systems, the stock will be hard to unload.

For someone with some speculative blood in his or her veins, I think Formula Systems could be a winning purchase. In an Iran-conflict situation, I would look to scoop up this ADR, now a $15, at $12.50 or less.

John Dorfman is chairman of Thunderstorm Capital LLC, a money-management firm in Boston. He can be reached at jdorfman@thunderstormcapital.com.

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