Even though I’ve been investing for 15 years, and even though I’ve been born and lived in Israel for my entire life, only in the last few years have I started looking under my nose at Israeli stock market.
The reason it took me so long is because the attractiveness of the Israeli stock market isn’t obvious. The large caps are on the cheap side, but not extremely so. the small cap index is full of biomed junk, so the small cap index usually underperforms.
Because stock index compositions around the world are so different, comparing price/earning multiples is pretty meaningless.
So how should investors measure the cheapness of markets, if there is such a thing, and what makes me say the Israeli stock market is the cheapest one out there?
My approach to cheapness is very grassroots. There aren’t any worthwhile screeners of Israeli stocks, so when looking for bargains in the Israeli market I go through all companies, from A to Z, every few months, something I did when investing abroad, but on a smaller scale and usually using screeners.
When I started this project my thought process was that I would quickly glance at the latest 10k and 10q, and unless there is something obviously interesting I would move on to the next company.From my experience in foreign markets, since most companies are a quick ‘nope’ I estimated the project will take a few dozen, or perhaps 100 hours for a first pass,. but soon I ran into a (good) problem.
Excluding large caps and biomed junk – the proportion of obviously cheap companies was absurd! I would say that most companies, large and junk excluded, were obviously cheap – Either selling well below equity or cash, selling at 10% of sales while growing and being profitable, Extremely high quality businesses with 40%> growth selling for single digit P/E, Selling at 1/4 of NAV (!) and so on.
Even after adding more and more rules (Only look at companies that will probably double in 2 years while also being safe enough that you would “sleep well” with 20% of your money in one) I still had to invest approximately 400-500 hours just to “glance” through 430 public companies.
I finished the first pass in december of ’19, and since then I’ve been meeting and studying some of the companies I found more deeply, and the more I learn about some of these businesses, the more bizarre the pricing seems.
What is a cheap market?
So, as I see it, the cheapness that matters to investors is the ability for investors to consistently find bargains. In that regard, I believe the Israeli stock market has no competition – especially not in developed countries with as strong an economy and currency as Israel.
So why are there so many bargains in Israel? I’m not sure – but let me offer some guesses: first, the language barrier. Very few people, globally, read hebrew and the “algo revolution” hasn’t reached us yet either,. funnily enough, while the market in the U.S. reacts to good or bad news in mili-seconds using robots with natural language processing, sometimes it can take a few hours in small caps to react to a company getting a big new client or publishing an amazing quarterly result.
Second, There is definitely a cultural fear of the stock market. Israelis love to invest in real estate, and would happily pay a decade’s salary on an apartment yielding 2.8% gross rent yield. Unlike other countries, we don’t have a stock investment culture, and the vast majority of Israelis don’t have direct stock holding.
So, be it a language thing, or a culture thing – the result is a stock market with bargains ripe for the picking, so let’s get down to business and talk about some bargains I really like, so you could judge for yourself.