Israel probably gets the most press coverage per capita of any
country in the world. The Jewish state's almost constant state of
hostility fascinates the world.
But in the midst of all this turmoil, Israel has created a tech
industry sporting the ingenuity and innovation to rival the fabled
Silicon Valley here in the U.S.
Centered around the port city of Haifa, Israel has 3,000
start-up companies specializing in tech. These start-ups aren't
producing low-value goods either. Forget about tee-shirts and
plastic Frisbees. These companies operate in sectors like medical
devices, wireless communication, security software - the list goes
Most of the 62 public Israeli companies trade on the Nasdaq
For a list of all of these companies, click here.
Over 40 venture capital funds fuel this tremendous group of
start-ups, meaning there is a robust flow of capital to spur
Tech clusters like Silicon Valley , Cambridge & Boston
Massachusetts and Israel breed unparalleled innovation - largely
because of the networks that develop between angel groups, venture
firms, start-up companies, and those that have already hit the big
time. In his 2008 book,
The Logic of Life
, Financial Times economist Tim Harford wrote:
"The more knowledge intensive an industry is, the more that
industry is concentrated in a small area... Looking at the
locations of over four thousand commercial innovations developed
all over the United States, economists have found that more than
half came from just three areas: clusters of innovation in
California, New York, New Jersey and Massachusetts."
The point Mr. Harford is making is that when you have a lot
of smart people working together in a tightly knit network, that
region is a virtual hotbed of knowledge sharing. Knowledge breeds
more knowledge, and when businesses pop up they tend to have
competitive advantages over those in less innovative
Small cap investors take note - Israel is one of these
***How did this young country, with its history of war and
instability, manage this accomplishment? Well, the army seems to
have played a pretty big role in Israel 's tech development.
Israel 's tenuous geopolitical situation has made compulsory
military service a necessity. Every Israeli spends at least a few
years in some part of the service, developing leadership skills,
and building a huge network rivaling the biggest American
universities. Young men and women with good technical skills join
the Taalpiyot Unit, which deals with highly advanced electronics
technology. When these people leave the army, they have the
technical skills, leadership ability, and connections to build new
and innovative companies.
Unfortunately, Israel's innovation cradle is no stranger to
rocket fire. But the violence has done very little to derail the
tech sector's growth.
Israelis have learned to adapt to the various levels of
hostility. Like a constant noise you can eventually tune out,
Israeli firms and investors have largely tuned out the
***Let's take the Gaza War of 2008 as a case study. The
three-week armed conflict took place in the Gaza Strip during the
winter of 2008-2009. I'll avoid the political motivations and such
for the war. On November 4, 2008 , the Israeli Defense Force made
their first major incursion into Gaza. From that day until
mid-December of the same year, more than 200 Qassam rockets and
mortar shells were fired into Israel.
Despite this surge in violence, the Tel Aviv Stock Exchange
traded more on news of Lehman Brother's collapse than battles next
door. Below is a chart of the TA-25, Tel Aviv's benchmark blue chip
index. The first arrow points to Lehman's collapse, the second
points to the outbreak of the War in Gaza.
This is a pretty consistent trend. In 2006, the Israel army
engaged in a very costly war in Lebanon. Less than three months
after the war, the Tel Aviv stock market hit all time highs. The
war put only a slight damper on growth, and after it ended, almost
every sector in the economy came out stronger than before.
***Maybe that stability in the face of violence is why Israel
has finally moved up to the big leagues. The tiny Middle-Eastern
state is now a member of the Organization for Economic Cooperation
and Development (OECD). The country is no longer considered an
emerging market. That's bad news for emerging market ETFs, most of
which give Israel a heavy weighting.
But it is great news for Israeli companies, and particularly
small cap stocks in the country. Being able to join the OECD is
like getting a good credit rating. As Nobel Prize-winning economist
Paul Krugman says, the Israeli economy is one of the world's "happy
The Jewish state didn't need financial stimulus to break out of
the global recession. They're on track to see an annualized growth
rate near 4% this year, and average unemployment has dropped almost
a whole percentage point.
In a world where developed countries are struggling with huge
debt loads and weak recoveries, Israel truly is a success story.
And boy do I like investing in success stories.
The availability of Israeli stocks on U.S. indexes, Israel's
stable economic position, and Israeli companies' constant
innovation make the country an unparalleled investment
***To capitalize on the opportunity, I've just added a second
Israeli micro-cap stock to the
Small Cap Investor PRO
portfolio. This tiny company is in a market that's projected to
grow by five hundred percent in the next couple of years. What's
more, the company's earnings should grow by 200 percent over the
next two years.
It's a tiny stock, and it trades on thin volume. But I believe
it's one of the best opportunities in Israeli technology right now.
to sign up for a no-risk trial subscription to
Small Cap Investor PRO
and learn more about this stock. The research report just went out
to subscribers yesterday, and is available on the website right