The conflict over the Gaza strip has dominated international
headlines for quite some time now. An enduring resolution to this
crisis seems elusive at the moment. Consequently, attention had
shifted from Israel's economic situation, until now. Data released
on Sunday shows that economic growth had declined even before the
conflict in Gaza commenced.
Growth Takes a Hit
According to data released by Israel's Central Bureau of Statistics
(CBS), GDP growth declined to 1.7% during the second quarter of
2014. Growth during the April to June quarter was significantly
lower than the 2.5% rate recorded in the first quarter of 2014 and
2.8% in the last quarter of 2013. Israel's economy grew at 2.5%
during the first half of the year.
In fact, growth is at its lowest level since the economic downturn
experienced during the first half of 2009. Taking into account the
fact that the country's population is growing at around 1.7% every
year, per capita growth has not taken place.
A 17.7% annualized decline in service exports and a 4.5% drop in
fixed investment were the major reasons for a decline in growth.
The CBS has emphasized that these are initial numbers which could
change once new data is taken into account. These figures come
close on the heels of an increase in the unemployment rate during
June. The metric increased from 5.6% in April to 6.3% in June.
Costs of War
These figures do not take into account the damage caused by the
month-long conflict with Hamas. The $250-billion economy will lose
heavily as a result of the continuing offensive. Foreign tourism
declined 25% in July. The slump is indicative of the impact that
more crucial sectors will feel.
Earlier this month, Governor of the Bank of Israel, Karnit Flug,
said the current conflict would cost the economy around $1.44
billion. Speaking to Channel 10, Flug said: "The assessment is that
it can reach up to around 0.5 percent of GDP, which is up to 5
Ratings agency Fitch's director of sovereign ratings Paul Gamble
said the budget deficit target for the year is likely to be missed.
This was in consonance with views expressed in Bank of Israel's
monetary report that the government would be unable to meet its
deficit target of 2.5% of GDP without raising taxes or postponing
Defense Cuts Elusive
Greater concern was expressed by Gamble about the future impact of
sustained defense spending. If conflicts of this nature occur at
regular intervals over the long term, a reduction in defense
spending was unlikely. Taken together with a decline in domestic
demand, this phenomenon has the ability to affect the economic
outlook for the country.
The Bank of Israel has lowered its interest rate significantly in
an attempt to boost domestic demand. It has also emphasized that a
diplomatic settlement could lift the economy. Flug said: "The
potential of a diplomatic settlement for helping growth is clear,
and it's also clear that a settlement could have helped." As of
now, a long term settlement remains elusive, endangering growth
prospects for the country.
Here we will list 3 Israel stocks that may witness further downside
due to these factors. These stocks have witnessed downward estimate
revisions recently. Moreover, share prices for each of these stocks
have also declined considerably. These stocks carry either Zacks
Rank #4 (Buy) or Zacks Rank #5 (Strong Buy).
magicJack VocalTec Ltd.
) provides software-driven solutions for the deployment of
next-generation, IP (Internet protocol)-based international and
long-distance telephony networks and related enhanced services.
The company provides routing and business powering enhanced
services. Its services include International and Long-Distance
Calling, Voice VPN (virtual private network), Calling Card,
Exchange Carriers and Voice-enhanced e-commerce. The stock holds a
Zacks Rank #5 (Strong Sell) and earnings for the current year are
projected to fall 69.3%.
- magicJack has seen 1 negative revision in the last 30 days for
the current quarter and current year estimates. Quarterly earnings
consensus has declined from 32 cents a share to 15 cents a share.
Yearly earnings consensus has dropped from $1.27 a share to 84
- The stock has lost 10.8% over the last four weeks.
RRSat Global Communications Network Ltd.
) provides global, comprehensive, content management and
distribution services to the rapidly expanding television and radio
broadcasting industries. Through its proprietary RRsat Global
Network, RRsat is able to offer high-quality and flexible global
distribution services for content providers.
RRsat's comprehensive content management services include producing
and playing out TV content as well as providing satellite
newsgathering services (SNG). RRsat concurrently provides these
services to more than 425 television and radio channels, covering
more than 150 countries. The stock holds a Zacks Rank #4 (Sell) and
earnings for the current year are projected to fall 26.7%.
- RRSat has seen 1 negative revision in the last 30 days for the
current quarter and for current year estimates. Quarterly earnings
consensus has declined from 11 cents a share to 7 cents a share.
Yearly earnings consensus has dropped from 44 cents a share to 33
- The stock has lost 13.9% over the last four weeks.
) manufactures medical foods and ingredients. Enzymotec's range of
products are targeted at the consumer wellness and health segment
and marketed to renowned global companies. The company operates
through two segments, VAYA Pharma and Nutrition.
Enzymotec provides specialty lipid-based products and solutions. It
serves pharmaceuticals and nutrition industries worldwide.
Enzymotec, Ltd. is based in Migdal HaEmeq, Israel.
The stock holds a Zacks Rank #4 (Sell) and earnings for the current
year are projected to fall 36%.
- Enzymotec has seen 3 negative revisions in the last 30 days for
the current quarter and 4 negative revisions for current year
estimates. Quarterly earnings consensus has declined from 22 cents
a share to 4 cents a share. Yearly earnings consensus has dropped
from 82 cents a share to 38 cents.
- The stock has lost 37.2% over the last four weeks.
Most analysts believe that the current conflict will not have a
long-term impact on the economy. Israel has experienced such
troubles earlier, only to recover within months. The country has
grown at around 3-4% over the last few years. Moreover, foreign
investors remain interested in its hi-tech sector.
However, a diplomatic resolution to the ongoing conflict would
go a long way in brightening the economic outlook. As of now, it
may be a good idea to drop these stocks from your portfolio.
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