7 Great Growth Stocks Based in Israel

It’s a country only slightly larger than the state of New Jersey that sits in the middle of one of the world’s most volatile regions and that has neighbors who are intent on its destruction. Since its founding 66 years ago, Israel has fought seven wars and countless other armed skirmishes. And now, a budding boycott movement protesting the occupation of Palestinian-inhabited lands threatens Israel’s economy even without the specter of another war.

Yet this relatively young nation in an ancient land has managed to support a thriving, technology-driven economy in the midst of turmoil and sluggish global growth. With more start-up businesses per capita than anywhere else in the world, Israel is brimming with tantalizing investment prospects. Moreover, many Israeli stocks trade in the U.S., making it simple for Americans to invest in the country.

The risks are substantial, to be sure. Not only do the country’s businesses grapple with political and physical threats, many are youthful enterprises that have yet to post a profit. But for long-term investors who don’t mind assuming some risks, the rewards could be great. “Israel is unique,” says Steve Schoenfeld, chief investment officer of BlueStar Indexes, a New York City firm that developed the index tracked by Market Vectors Israel ETF (symbol ISRA), an exchange-traded fund. “It’s a small country with a very large global footprint, and it bats well above its average in all of the metrics that define a successful economy.”

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Even when much of the developed world was retrenching in 2009, for example, Israel was able to eke out modest growth. Since then, the nation’s economy has been growing at nearly twice the pace of the U.S. economy. Its jobless rate, at 5.4%, is among the lowest in the developed world. And thanks partly to the arrival in the 1990s of a wave of highly educated immigrants from the former Soviet Union, Israel has become a technological powerhouse. It is a second home to virtually every big high-tech company in the world, including Apple, Google, Intel and Microsoft.

Few companies illustrate the daily mix of old and new, traditional and groundbreaking, quite like CaesarStone Sdot-Yam (CSTE). Located just a few miles from the ruins of the ancient Roman city of Caesarea, this building-products company operates out of Kibbutz Sdot Yam, a commune that’s older than the state of Israel itself. Its workers were traditionally employed making terrazzo tiles. Now they combine quartz and high-tech polymers to create floors and countertops for high-end homes. Thanks in part to the housing revival in the U.S.—Caesarstone’s biggest market—sales and profits are rocking. Analysts on average expect the company to earn $2.22 per share this year, up 23% from 2013 and nearly double Caesarstone’s 2012 profit. The stock, which has climbed more than fivefold since Caesarstone went public in March 2012 and now commands a market value of $2.1 billion, sells for 27 times forecast earnings—not cheap, but not outrageously expensive in light of the company’s rapid growth. (Share prices are as of March 7.)

Many promising Israeli companies are in health care. Consider Compugen (CGEN), located in Tel Aviv, and Jerusalem-based Oramed Pharmaceuticals (ORMP). Neither biotech firm is profitable yet, but both appear to be on the verge of breakthroughs that are likely to put them on the map.

Over the past few years, Compugen has been focusing on immunology and oncology, using complex computer algorithms to discover novel immune system checkpoint inhibitors, which work by unleashing the body’s own immune system to attack cancer cells. In a sign of confidence in Compugen’s technology, German pharmaceutical giant Bayer AG said last year that it would commit up to $540 million to develop drugs jointly with Compugen. Compugen’s stock shot up when the Bayer deal was announced, and Graig Suvannavejh, an analyst with MLV & Co., a New York City–based investment bank, thinks it will react similarly when more deals are inked over the coming year.

Oramed is working on an oral form of insulin as an alternative to the injected version that is used to treat diabetes. The pill is in late-stage trials, which means it stands a good chance of getting approved by the Food and Drug Administration. Suvannavejh thinks diabetics will happily toss their syringes and turn Oramed into a key player in a rapidly growing, multi-billion-dollar market. The stock could reach $27 within a year, he says.

You don’t have to go beyond the stock symbol of Alcobra (ADHD) to figure out its focus. At a time when attention-deficit hyperactivity disorder appears to be reaching epidemic proportions, Alcobra is developing an alternative to traditional ADHD medications. Alcobra’s solution, a slow-release form of Metadoxine, appears to be both effective and less addictive than other ADHD medications, says Stifel, Nicolaus analyst Annabel Samimy. The FDA has already approved use of the drug to treat the rare Fragile X syndrome, a genetic disorder that causes cognitive delays, and it’s in final stages of testing for ADHD. Samimy expects Alcobra to win re­gulatory approval for treatment of ADHD and expects the stock to reach $30 within a year.

The corridor between Tel Aviv and Haifa to the north, nicknamed Silicon Wadi, is brimming with companies that are working on ways to speed and secure Web commerce. Silicom (SILC) makes adapters that serve as building blocks for all sorts of technological appliances. Because many of its customers are growing rapidly, so is Silicom; revenues jumped 50% last year. Needham & Co. analyst Alex Henderson says Silicom can’t maintain that pace indefinitely, but he expects a 20% growth rate in both sales and profits for 2014 and 16% the following year. He thinks the stock, at 26 times projected 2014 earnings, is a steal.

With an increasing number of consumers speeding through cyberspace, computer networks are finding themselves bedeviled by a familiar problem: traffic jams. Radware (RDWR) makes products to unplug those bottlenecks while maintaining the security of computer networks. The 17-year-old Tel Aviv firm has proved so effective that it has been stealing business from its better-known, Seattle-based rival, F5 Networks, says Henderson. He sees earnings growing more than 20% in 2014 and at a 15% pace in 2015. The stock, selling at 21 times estimated 2014 earnings, seems reasonably priced. Plus, Radware has a strong balance sheet, with no debt and $6 per share in cash.

No discussion about Israel would be complete without a few words about Teva Pharmaceuticals (TEVA), which, with a market value of $41.8 billion, is by far the largest company on the Tel Aviv Stock Exchange. Teva is the world’s biggest maker of generic drugs, with knockoffs accounting for about half of its annual sales of about $20 billion. Ironically, though, the stock has been a mediocre performer over the past few years because of patent expirations on some of the branded drugs in Teva’s product line. Morgan Stanley analyst David Risinger estimates that Copaxone, a multiple sclerosis treatment that loses patent protection this summer, accounts for 45% of Teva’s earnings per share and cash flow.

Despite climbing 25% since mid December, Teva’s stock has returned a mere 3.8% annualized over the past five years through March 7. But William Scholes, assistant investment manager of the Aberdeen Israel Fund (ISL), a closed-end fund, thinks the stock, at just 11 times estimated 2014 earnings and boasting a dividend yield of 2.8%, is a bargain. Teva is cutting costs, developing new drugs and recently installed a new CEO.