Aaron Katsman
www.IsraelNewsletter.com

As IOI fans are aware, last week was my wife’s birthday. After deciding NOT to buy her jewelry, I found 2 Israeli stocks that were the perfect gift. Well wouldn’t you know today happens to be the birthday of none other than my mother in law!  While I could clearly take this post in many directions, as a good son in law, I will be well behaved and present a stock that’s worthy of being her birthday gift. Keep in mind that the name of the stock about to be mentioned should not be taken as a reflection of our relationship.

012 Smile Communications (Nasdaq: SMLC) is an interesting little Israeli communications company.  To read more about them check out the excerpt from our newsletter, as 012 Smile was a top Israeli pick from Stearman Capital’s, Zachary Scheidt.

The company is focusing on strong growth, high margin services. They have 500,000 broadband subscribers and that number is growing, and are the first company in Israel to launch nationwide Voice Over Broadband(VOB) service. The third quarter showed 39% growth in their VOB subscriber base.

As for the tradition voice aspect of the company they decided not to pursue certain hubbing opportunities due to their low margin contribution to profitability. They continue to focus on higher margin product suite to residential and business customers.

For investors looking for exposure to Israeli domestic telecom, this is an interesting company.

As for my mother in law, happy birthday and just Smile! 

Disclosure: Author’s fund has a position and is long the stock of SMLC as of 1/16/08.

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Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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The entire interview with Stearman Capital’s, Zachary Scheidt, is part of our new subscription newsletter, Israel Opportunity Investor. You can find out more about the product and the opportunities we cover at www.israelnewsletter.com

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Can you tell us a bit about your firm?

Zachary D. Scheidt: Stearman Capital is unique in that it focuses on stocks that are new to public markets. While our formal universe includes stocks that have been public less than five years, most of our investments turn out to be companies that have issued stock within the past 12 to 18 months.

We believe that there is an information disconnect for many names in our universe because up to this point there has been little or no media or analyst coverage leading up to the IPO. Once a company comes into the public realm, the first people to write about the names usually have an agenda. Underwriters issue reports after the quiet period is over with the hopes that their positive rating will propel the stock higher. This helps their reputation when soliciting investment banking business from other clients and also creates goodwill with the management of the newly issued stock. Goodwill is important in their business model because a large portion of companies who issue public stock come back to markets to raise additional capital.

I believe that Stearman is able to capture positive returns by digging through the primary information from the company as well as third party research to find the nuggets of truth that point to the eventual direction of these often misunderstood stocks.

One more advantage that we have is our relationships with multiple underwriters. When a company is pricing an IPO, we take calls from most of the major brokerages selling the deal and are able to pick up on the demand for a particular issue. If a contact calls in and says, “This deal is going to be red hot and I can get you as many shares as you want!”, we know that there is excess supply and the underwriters are pushing to get the deal sold. So, while you have to read between the lines at times, the relationships with these important firms gives us an edge that is difficult to quantify and nearly impossible to duplicate.

How does a firm located in Atlanta, GA start investing in small Israeli companies?

ZS: Well, believe it or not, the process is very simple. As Israel’s economy continues to evolve and new enterprises demand capital for expansion, companies often come to US markets to raise that capital. With technology making the world smaller every day, our research process is able to grapple through the same information that hits the desk on the 87th floor of a Park Avenue office (with considerably less overhead, I might add) and we are able to make a well-informed decision based on publicly available information.

To me there is not much difference in picking a stock based in NYC, San Francisco, London, Buenos Aires, or Tel Aviv. While currency issues come into play, local culture and customs are of course important, but the bottom line is whether I can make money trading the stock or not. The price of the stock will fall in line with supply and demand and that will be based on the public expectation of the future prosperity of the business. So if I can get an edge on what that public perception will be, I can trade a stock successfully, no matter where the company is located. (Continue »)

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Marvel Technology (Nasdaq: MRVL) getting rocked and hitting a 52 week low after a weak earnings report. The company posted a loss of $ 6.4 million, or -$.01 per share, on revenue of $758.2 million for the third quarter ended Oct. 27. During the same period a year ago, Marvell earned $6 million, or $.01 per share, on revenue of $520.4 million.

Veraz Networks (Nasdaq: VRAZ) closes a deal with ONEMAX for the first-ever deployment of an IMS over WiMAX network in the Americas.

Internet Gold (Nasdaq: IGLD) announces earnings. We also saw the IPO of IGLD’s subsidiary, 012 Smile.Communications (Nasdaq: SMLC) this quarter.

Shamir Optical (Nasdaq: SHMR) reported earnings with an increase of 50% in adjusted net income. Not too shabby.

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