Recently Israelnewsletter.com had a chance to interview Jamia Jasper, portfolio manager of The American Israeli Shared Values Capital Appreciation Fund. This interview shouldn’t be taken as a solicitation or recommendation to buy or sell securities. The views and opinions are solely of the interviewee, and are not that of Israelnewsletter.com. You should not consider the information here to consist in any way of investment advice, and you should speak with your own adviser and do your own research before making any investment decisions.
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Jamia, can you tell us about your fund?
Jamia Jasper: The American Israeli Shared Values Fund is an actively managed mutual fund that invests in the stocks of Israeli companies and U.S. companies that do business with Israel. It is a multi-cap fund with about 50% Israeli stocks and 50% U.S. stocks. In addition to the primary goal of long-term capital appreciation for investors, the Fund aims to expand the market for Israeli companies, making it easier for businesses there to raise capital and expand. Lastly, I have pledged to donate 7% of my personal profits from this venture, or a minimum of $5,000 per year, to charities and educational and research institutions in Israel.
How did you get started investing in Israel?
JJ: I have a business education and prior career experience as a credit analyst and a long history of personal investing. I noticed that many interesting technologies were coming out of Israel and that many of their stocks traded in the US. Israeli companies are conservatively managed with low valuations, allowing for significant appreciation potential. I did well with my initial investments and began looking for other ways to invest in Israel. At the time there was one index Fund for Israeli stocks and no actively managed mutual funds. I was very surprised that a big investment house had not already created an Israeli mutual fund. I decided to create one to satisfy the needs of other investors looking to invest in Israel, whether for investment purposes or for a show of solidarity.
Can you tell us about some of the Israeli stocks that trade in the US?
JJ: All of the companies listed below are in the portfolio because they have solid business fundamentals, excellent management, are debt-free, and have good free cash flow.
ESLT– Elbit Systems focuses on advanced solutions in defense electronics. It is a growth company due to the early stage of adoption of its products in the market. The company is experiencing rapid earnings growth and the shares trade at a reasonable multiple of earnings and cash flow. Also, it is a defensive play given its lower exposure to economic cycles. The company is winning an increasing number of contracts from countries outside its traditional market of the U.S./Israel, in places such as Europe, India, and the Far East.
NICE- Nice Systems is a provider of solutions that capture, manage and analyze unstructured data. Its largest clients include the U.S. government for homeland security monitoring and financial companies for compliance purposes. NICE has organic sales growth of 12-15% annually, no debt, and approximately $150 million in free cash flow, which equates to a free cash flow yield of 7-8%. The company can buy back 25% of its outstanding shares, which would increase EPS by 20% or it can institute a dividend of 5% or more. The shares appear undervalued at the current price of $28.
GIVN- Given Imaging Ltd. is a medical device company that specializes in non-invasive, wireless technologies to diagnose gastrointestinal disorders. It has a unique, principal product, the Pillcam SB, which is a dissolvable pill that takes color video of the gastrointestinal tract. It is sold in 60 countries worldwide. The company has a solid balance sheet, with more than $100 million in cash and no debt. Currently the U.S. and Japan have insurance carrier coverage for the products. The French government is expected to provide reimbursement for the product in 2008. Given Systems could be an attractive acquisition target for any of the large GI or diagnostics companies.
TEVA- Teva Pharmaceuticals is the largest generic drug manufacturer in the world. Generic drugs are part of the solution to the world-wide healthcare cost crisis. Their next big leg of growth should be generic biotechnology since the company already has the unique capability to produce protein-based drugs (as opposed to chemicals). Teva also has excellent research capabilities in conjunction with other Israeli research institutions. In addition to organic earnings growth from its generic drugs and proprietary treatments for MS and Parkinsons, the company just reached an agreement to acquire Barr Labs. Barr is a U.S.-based generic drug manufacturer with 25 applications for generics already filed with the FDA. The acquisition of Barr is expected to be accretive to Teva’s earnings shortly after the transaction closes.
Tell us about some of the companies that you hold that do business in Israel? Why is the Israel piece interesting?
JJ: The US companies in the portfolio must have a business relationship with Israel. These include:
MSFT- Microsoft has been in Israel since 1991 with core R&D and start-up incubation activities, as well as venture capital outreach to create partnerships with the local pool of high-tech talent. Windows NT and XP were developed in Israel. Right now, the stock is incredibly cheap at 12x earnings and $23 billion of free cash flow in fiscal 2008 (8% fcf yield).
MDT– Medtronic is a medical device company that, among other things, controls nearly half of a $6 billion global defibrillator market. Its fastest-growing businesses include products for diabetics and small electrical implants used to alleviate pain and to treat neurological disorders. Medtronic has offices in Israel, which are primarily sales offices, but also are used as a base for discussions with Israeli medical device R&D companies. The company has expected earnings growth of 11-15% for 2008 and the shares currently trade at a significant discount to historical valuation.
AMGN – Amgen is one the world’s largest biotechnology companies. The company has a licensing agreement with the Israeli company Gamida Cell Ltd., to share several of its proprietary cytokines in the manufacturing of Gamida’s StemEx, a treatment for hematological diseases. Amgen will receive a minority equity interest in Gamida Cell in addition to royalty payments from future sales of StemEx. Right now AMGN is selling at a low 14x EPS and free cash flow is estimated to climb to $5.4 billion in 2008.
CAT – Caterpillar sells their tractor and trailer equipment to the Israeli military. While it is not a significant part of their business, the company has shown loyalty to Israel by continuing to sell to them despite threats of boycotts. From an investment perspective, CAT is benefiting from the boom in mining companies purchasing large machines. Right now the company trades at 11x earnings. Last year the company had $5 billion of free cash flow, which is nearly a 10% free cash flow yield. This is very high, even for a cyclical company like CAT.
Thanks.
Jamia C. Jasper is the portfolio manager of the American Israeli Shared Values Capital Appreciation Fund and has been responsible for the Fund since its inception in 2007. Ms. Jasper has committed her own capital to establish and launch the Fund and its investment advisor.
Ms. Jasper’s background includes nearly a decade in investments and financial services and several years as a staffer in the US House of Representatives. Jamia was most recently with the Bank of New York, where her responsibilities included the financial analysis of public companies. Prior to joining the Bank, Jamia worked for Jones Lang LaSalle, a leading real estate and investment management firm. Ms. Jasper holds a BA in International Relations from the University of Southern California and an MBA from Cornell University.
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It is important to understand that share price, principal value and return will vary, and you may have a gain or loss when you sell your shares. All mutual funds can be affected by market and investment style risk. The Fund’s investments in small and mid capitalization companies could experience greater volatility than investments in large capitalization companies. Request a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and carefully consider before investing. A prospectus can be obtained by calling your investment professional.
Zack Miller
IsraelNewsletter.com
Well, Google’s (GOOG) April announcement that it would be adding a hosted version of presentation software as part of Google Docs — Google’s nascent stab at a full productivity suite– via an acquisition of Tonic Systems has been realized today with the search provider’s official announcement of Presentation as part of its hosted office solution. Presentation joins Google Docs Word Processing application, Docs (creative name, no?), and Spreadsheet application, Spreadsheet (even more creative).
What this means is that Google now has the equivalent functionality of Microsoft’s (MSFT) Office Suite to compete head-on versus Microsoft Word, Excel, and Powerpoint.
[youtube=http://www.youtube.com/watch?v=eRqUE6IHTEA]
Adding to the excitement, without much fanfare in the press (hey, it’s Apple — a company known to plan entire days around Steve Jobs’ choice of lunch), Apple had a seminal announcement last month as it introduced a speadsheet application, Numbers (a bit more creative!) to round-out its own productivity software in iWork ‘08. Apple now offers Pages, its word processing software with Apple flare, Keynote (hands-down, a Powerpoint killer — hey, I’m biased), and now Numbers, Apple’s spreadsheet offering.
I’m not going to use this space to compare functionality, mano a mano, of the three office suites. There are numerous analysts (See Carl Howe in particular) who do excellent work in this space. Instead, I’d like to think (write?) out loud about how these products stack up against one another in light of their parent companies’ strategic objectives. While these companies will compete head-on with their new product suites, as we’ll explore in this article, each company has its own, very different reasons for producing a kick-butt office suite.
Microsoft
The Office Environment for Office: In spite of talk of its demise, Microsoft hasn’t been dismissed yet. While the open source movement continues to make inroads on the server side with Unix-inspired systems, Microsoft’s dominance of the OS and Office Suite on the desktop of corporate computers worldwide is still extremely entrenched.
Because Microsoft continues to control the heart of the office (see image at left), Microsoft continues to run a healthy business off of providing solutions, services, servers and programs to the global business community.
Lock In — from the office homeward: For MSFT, controlling the office means that for me to communicate as a business person, I need to buy Microsoft products (or at least products that can be translated to work with MSFT products) This has historically enabled MSFT to own my computer’s OS and office suite at home. For to communicate with my work life, I need parity of products and platform. This leverage into the home computer via the office environment, is why it’s so important for MSFT to maintain its Office Suite dominance.
What’s happening to MSFT after years of failed attempts for competitors to take on Office within the corporate office, Microsoft now faces competition from the backdoor: home users. As Apple, Google, Open Office and whatever begin to garner a following at home, this momentum, if it reaches critical mass in terms of demand and functionality and support in terms of supply, may begin to chip away at MSFT’s dominance in the office. If MSFT’s dominance in the office is challenged, their dominance at home is equally at peril.
Strategy to Compete: I know there is a lot of rhetoric coming from Redmond on their strategy, but I’m hard pressed to see a cohesive strategy to compete with Apple and Google. Microsoft Live is not living up to its hype and spending time and money on game consoles and failed consumer devices shouldn’t be MSFT’s strategy. Nor should be competing for search. Google is using search to take over the desktop and ultimately, trojan horse into the corporate environment — MSFT needs to understand this.
Google
Capturing web search to own the Web Operating System: I know the stats say otherwise, but do you really use any other search engine other than Google. Really?? Google owns my web experience by organizing my web life and by using apps/products/services to get me to commit more info into the system, Google creates a lot of reliance. I’m still using Gmail at work and to communicate with clients. I’ve got Google Desktop running on my office machine. Google’s new productivity suite aims at Microsoft’s jugular and it’s Google’s foothold into challenging MSFT.
From my home into the office: I’m addicted to Google products at home. I NEED THEM. When I get to work, that dependence doesn’t go away. Now that Google has an offering in the Office space, a product that actually has some advantages over other products of its type, I’m apt to begin introducing my colleagues to Google (I’m thinking Aaron “Instant Rebate” Katsman may write even more compelling analysis on Israeli stocks in a Google Doc).
I love Google Docs for two reasons:
- Storage: I love that these docs are accessible from whatever machine I use. I log in via my phone, my home laptop, and my office box and I never have to worry about versioning. I manage one doc in one place.
- Collaboration: I know MSFT has had collaborative tools for years. But guess what? I never used them — nor would I know how to. With Google Docs, I invite my colleagues (read, Aaron Katsman) into a document that’s hosted by Google and updates in real time. We can edit each others’ articles and even chat in real time on the document itself. What about biz dev and legal stuff with contracts? I don’t know about your firm but I’ve been part of negotiations where the red-lining probably went back and forth over 50 times — all saved under different file names. That’s too much to manage for me (maybe for anyone, other than lawyers).
As I think about how I’m decreasing my dependence on Microsoft products, I realize that Google has added an incredible feature as well. Certainly, Google Docs allows me to save documentation into standard formats that my non-Google-ized colleagues can use. But there’s more. In fact, Google provides the ability to upload your MSFT Office-created documents to Google Docs, convert it into Google format, and continue to work with the application vis-a-vis Google Docs. This is big and important.
Jumping the shark: Given its competitive technology, collaborative features and an ever-growing reliance on Google products, I believe that Google Docs will provide a slow movement away from MSFT Office in the office. In fact, Google is basically saying, “We’re coming to your crib to party!” with last week’s announcement that Cap Gemini will support enterprise versions of Google Docs in Europe. Google will need to continue developing functionality and integrating Docs into your core Google experience. Apple will need to follow suit on the support side and learn from Google’s prescient move to attract the business user.
Apple
Using consumer devices to own my desk: Apple is on-fire with all its new product introductions. In fact, I think the velocity is a bit much, BUT, I’m listening to a lot of music that I’ve bought via iTunes on my iPod that I’ve upgraded 3 times. Apple’s also done a good job convincing me to add phone functionality to this experience. It all works very well with my MacBook Pro. Apple’s Halo Effect, introducing consumers to Apple consumer electronic products and eventually funneling these to increased Mac sales, has been, until recently, about owning the home computing experience. We’ve seen the numbers attest to Mac notebook growth in market share (according to NPD, Apple’s U.S. retail notebook market share for June 2007 was 17.6%, a gain of 2.2% over 2006).
Filling the business void with an office suite: What business could afford to migrate to a Mac environment given the fact that while things might run more smoothly internally (I’d postulate — though I can’t prove it — that although Apple products retail at a higher price point, total cost of ownership is lower for Apple products), they can’t interface with the rest of the world because of Microsoft’s dominance. No longer — Apple now provides the functionality to compete for the business customer. Apple’s next move will have to be global training and mobilization of third-party support to attract, service, and retain the fledgling business customer.
What does this all mean for investors?
Of these three players, I think Google is best situated for success. What Google, Salesforce.com, et al. have shown is that there is going to be a huge market for SaaS (Software as a Service). In fact, Web Search is really just SaaS 1.0. Instead of buying yellow page CD-ROMs (remember doing that?!), I just count on Google to provide great, FRESH results — all the time. I just type. I think the hardware becomes less important (not more important as AAPL is betting on) and it’s going to be all about the integration of web apps with my desktop and allowing the heavy processing to occur server side. Lastly, Apple and MSFT are going to ultimately butt-heads in a way that Apple doesn’t really know how to compete. To get to the business customer, Apple will need to open up by partnering in the service experience — something they didn’t quite get and the same thing that almost sunk them a decade ago. And for Microsoft, I think they’ve really reached the point of becoming a “Technology Utility”.
Disclosure: Author’s fund does not have a position in any of the stocks mentioned here as of 9/18/07. Author owns GOOG personally.
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Zack Miller is the lead equity analyst for America Israel Investment Associates, LLC. and a former equity analyst for a leading multinational hedge fund. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email zack@profile-financial.com
