Stock Quotes in this Article: ESLT, ISL, MAIL, TEVA

MILLBURN, N.J. (Stockpickr) -- I have long been a follower and investor in Israeli stocks. This is partly due to my cultural links to the country, but more important, Israel is a hot bed for technology, engineering, science and medicine. Many major U.S. corporations, such as Intel (INTC), have large operations in Israel.

Over the years I have been in and out of many Israeli stocks. However, there is one stock that I have held continuously for the past eight years: Aberdeen Israel Fund (ISL). This stock has provided me with a well-diversified portfolio of investments in Israeli. While the fund holds several stocks that are available in ADR form to U.S.-based investors, it also hold positions in stocks only traded in Israel and some private equity / venture capital investments. The annual report is an interesting read.

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    There are some other interesting stocks in Israel that can be directly invested in the U.S. in American depository receipt form. I’ve compiled a portfolio of Israeli stock opportunities in a portfolio. The following three are some of my favorites, and all pay dividends that earn them spots on highest-yielding stocks lists.

     

    Teva Pharmaceutical

    Teva Pharmaceutical (TEVA), which yields 1.7% and is one of the highest-yielding drug stocks, is the largest stock in Israel, according to market capitalization. The company manufactures, develops and markets a wide portfolio of pharmaceuticals. On a proprietary basis, Teva is engaged in research into solutions for multiple sclerosis, ALS, Crohn’s disease and other neurological, autoimmune and oncology disorders. The company’s Copaxone injection therapy is one of the leading solutions for MS.

    Furthermore, Teva is one of the largest manufacturers of generic drugs in the world, which is a very lucrative business. Generic drugs are produced after the expiration of patents held by the original manufacturer -- so as patents expire for large pharmaceutical companies such as Pfizer (PFE) and Merck (MRK), manufacturers such as Teva can begin to produce generic versions of those drugs and capture market share without investing large amounts of capital into research and development.

    Despite consistently growing earnings in the low double digit percentages, Teva’s stock price declined in 2010 by 7% and so far by about 7% in 2011. The 1.70% annual dividend has softened the blow to the stock price decline. With the stock selling at around $48.42, I believe you are getting one of the world’s best pharmaceutical companies at a discounted price. I believe that the stock can rise to as much as $65 by the end of this year.

    Teva, one of 10 stocks hedge funds were buying like crazy in the most recently reported quarter, shows up on a recent list of 10 Health Care Stocks With Upside.

    IncrediMail

    IncrediMail (MAIL) is not exactly a household name. As opposed to the $47 billion Teva Pharmaceuticals, IncrediMail’s market cap of $68 million is a virtual drop in the bucket. But while micro-cap companies are small and more risky, they do have the potential to grow into larger companies.

    IncrediMail, which yields 11.3% and is one of the highest-yielding computer software and services stocks, produces digital media solutions for desktop applications in10 different languages for sale in more than 100 countries worldwide. In particular, the company has a fascinating email product that allows users to customize emails and better perform searches.

    Sales and earnings per share for IncrediMail have nearly tripled from 2006 to 2010. What is really intriguing is that the company has $29.6 million in cash and short-term investments and only $1.4 million of long-term debt. The net amount of cash of $28.4 million is about 40% of the stock’s market cap. Thus, nearly $3 of the stock price is represented by net cash and equivalents. This stock will either be used to further develop creative products, acquire smaller Israeli software companies or be returned to shareholders.

    IncrediMail trades at 8.5 times trailing earnings. If you factor out the cash on the balance sheet, the earnings multiple is even less. IncrediMail will certainly take out its 52-week high of $8.10 and could rise to as much as $10.00.

    Elbit Systems

    War is never something to get excited about. However, many smart businesses and entrepreneurs have made money from war -- on both the winning and losing sides. A conflict is now escalating in Libya while the U.S. continues to fight wars in Afghanistan and Iraq.

    Israel is always on military high alert, and the country has a homegrown defense contractor, Elbit Systems (ESLT), which develops, manufactures and integrates advanced high-performance defense electronic and electro-optic systems. The company acts as a contractor for land, air and sea defense platforms. Its major product lines include unmanned or drone aircraft systems -- its Hermes line is world-class -- homeland security systems, helmet-mounted systems, signal intelligence and electronic warfare.

    Not only does Elbit Systems supply the Israel Defense Forces, but it also sells or subcontracts to other defense manufacturers and foreign governments around the world.

    The company is coming off a disappointing 2010, during which revenues stumbled and greater-than-expected expense growth also cut into earnings. As a result, the stock has traded like a roller coaster in a tight range between $50 and $55 for nearly a year now. I believe that 2011 will be a year when the company can get its cost structure under control and begin to work off its large backlog of orders.

    Furthermore, increasing demand from emerging economies will boost growth for Elbit Systems. If the stock can get out of its funk and break out over $55, I think that it can easily trade back up to $65.

    Elbit Systems yields 0.7%, earning it a spot on the list of the top-yielding aerospace and defense stocks.

    To see these stocks in action, check out the Investment Opportunities in Israel portfolio.

    -- Written by Scott Rothbort in Millburn, N.J.

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    At the time of writing, author was long ISL and MAIL.

    Scott Rothbort has over 25 years of experience in the financial services industry. He is the founder and president of LakeView Asset Management, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of TheFinanceProfessor.com, an educational social networking site, and publisher of The LakeView Restaurant & Food Chain Report. Rothbort is also a professor of finance at Seton Hall University's Stillman School of Business.