The Promised Land Delivers

02/09/2010 9:30 am EST


Carla Pasternak

Editor, The Income Investor

Israeli cellular provider Cellcom is one of many companies capitalizing on the tech-savvy country's resilience, writes Carla Pasternak in High-Yield International.

Israeli telecom Cellcom (NYSE: CEL) has delivered returns of 27% since we first flagged it as a top performerthis past July. It still yields nearly 10%, and at a forward price/earnings [ratio] of less than [three times], the shares should still have legs. [Shares closed at $32.55 in New York Tuesday, up from $32.06 at the time of Pasternak's recommendation—Editor.]  

But Cellcom is not alone. Israel is an often overlooked but highly attractive emerging market that is home to a number of other high-yield/high-return stocks.

We say "emerging," but this May index maker Morgan Stanley Capital International (MSCI) plans to upgrade the status of Israel to "developed."

That means MSCI's Israel Index will be included in its benchmark EAFE (Europe, Australasia, Far East) Index of the developed world. The upgrade will likely give a shot in the arm to the country's equities, as funds limited to developed markets rebalance their portfolios to include Israeli stocks.

Everybody knows about China's high-speed equities market, but Israel's Tel Aviv 100 soared 77% over the past year. And for income investors, the Israeli shekel's rise against the dollar boosted the value of dividends by about 9%.

The shekel is strengthening because the Israeli economy is booming—so much so that the Bank of Israel was the first central bank since the start of the recovery to raise short-term interest rates back in August 2009. It raised rates a third time in five months on December 28th, up to 1.25% from a record low of 0.50% in mid-2009.

Looking ahead, the outlook is bright. Israel's Central Bureau of Statistics is now forecasting growth in 2010 of 3.5% -4.0%, up from a previous forecast of 2.5%. By contrast, the US saw a contraction of 2.7% in 2009 and the European Union shrank 4.2%, according to the International Monetary Fund.

Israel can thank its high-tech sector for much of this growth. The country is an export-driven economy, with exports comprising some 44% of its GDP. And high-tech exports, which account for over half of the country's industrial exports, are surging. Global demand for Israeli electronic components, for example, more than doubled in late 2009 over the [same period a year ago], according to the country's Central Bureau of Statistics.

In their recently published book Start-Up Nation, authors Dan Senor and Saul Singer also detail how the country's technological savvy has created its prosperity. As Microsoft (Nasdaq: MSFT) CEO Steve Ballmer said when inaugurating a new R&D lab in Israel, "Microsoft is as much an Israeli company as an American company."

This tiny nation, slightly smaller than New Jersey, has more firms listed on Nasdaq than any country outside the US—its 63 listings at the start of 2009 are more than Europe, Japan, Korea, India, and China combined!

The good news for income investors is that [several] of these firms pay yields of 6% or more, including Cellcom and Formula Systems (FORTY). So if tech, which led the charge in 2009, stays on trend in 2010, these high-yield stocks should be winning picks.

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