An interview with Silicom (SILC) was featured as 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 the history of Silicom (Nasdaq: SILC)?
Avi Eizenman, Founder and Chairman of the Board: When we founded the company in 1987, our original idea for the firm was that we would be a fabless IC company. We were profitable almost from day one and this is something that’s in the fabric of the company. (Continue »)

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After numerous rumors of its emergence and a waiting period that rivaled Godot, finally an pure Israel ETF emerged from the big players. iShares launched the iShares MSCI Israel Capped Investable Market Index Fund (EIS). Get the prospects here and the fund fact sheet here. The iShares page on the ESI is here.

I wrote recently about an ETF targeting Israel. In “Is a newish ETF a good way to invest in the Jewish state?“, we examined the new SPDR Emerging Middle East & Africa (GAF). The take-away was a bit disappointing as South Africa’s presence in the ETF weighed in at over 60% and TEVA Pharmaceuticals (TEVA) was a full 9% holding of the fund. So, not a great way to play:

1) Israel as an investment destination (and there are plenty of reasons to want to do that, see this and this.)

2) Not a great way to play the Middle East or Africa as South Africa’s overwhelming presence kind of skews this as a South African play with some exposure to banking, pharma, chemicals and tech in Israel.

Something new

So, we’ve been waiting anxiously to see a ‘real’ Israeli ETF and it appears that the iShares MSCI Israel Capped Investable Market Index Fund (EIS) is a good start. Remember, the First Israel Fund (ISL) and the Amidex35 (AMDEX) also provide access to the Israeli market but I think investors may be waiting for an iShares-like product for some more trading liquidity.

Couple things here:

1) This ETF invests in local, Israeli shares. Not ADRs. This is typically a good thing as some of the interesting things going on in the Israel thesis are taking place on the ground in Israel.

So you have exposure to the Israeli shekel which as we’ve spoken about a lot previously, has been one of the strongest currencies in the world over the past year. Because the ETF itself is priced in dollars and invests locally in Israel, investors would benefit greatly from the currency exposure in a strengthening shekel environment and take a hit if (when?) the shekel begins to weaken, something the Bank of Israel is currently attempting to do.

This is neither ‘good’ nor ‘bad’ but there will be movement in the exchange rate that will affect returns one way or another, perhaps even inversely to the performance of the individual stocks that comprise the fund. Meaning, say the Israel market (specifically, these companies held by EIS, go up 15% (not a bad year) and the shekel depreciates vis-a-vis the dollar by more than that, add in fees and you’re looking at a down year.

2) Whoa! Teva clocks in at a hefty 25% of total assets. On the Tel Aviv Stock Exchange’s TA-25, Teva is “only” 9% or so of market cap weighting. Still a lot but nowhere near 25%. That’s a lot of exposure to one company and one industry when trying to get exposure to Israel as a market.

3) The top 10 holding comprise almost 70% of the ETF’s holdings. I assume iShares did this because it needs liquidity in some of the bigger names but this somewhat skews the exposure to the Israeli market. It’s a lot of concentration in just a few names and overweights health care and financial and underweights tech and telecom.

Given this concentration, you have the following exposure to Israeli industries:

a) Health Care 25%

b) Financial 22%

c) Materials 16%

d) IT 12%

e) Industrials 10%

f) Telecom 7%

g) Consumer discretionary 3.6%

h) Energy 2%

i) Consumer staples 2%

I’m not saying this positively or negatively either but Israel’s GDP has been solidly around 5% for the past couple of years. That’s interesting but as a technology investor with exposure to Israel, I’m looking to invest in the sexier, high-tech firms that capitalize on Israeli Ingenuity, not invest in local cellular operators facing 120% subscriber penetration. That’s NOT to say someone looking for global diversification won’t find this ETF interesting. They may very well find this ETF as a good way to play the local Israeli economy with exposure to the shekel. It’s just not my personal thesis.

Disclosure: Author holds a position in TEVA and numerous Israeli stocks via the Israel Growth Fund, a fund of which his partner, Aaron Katsman, is the portfolio manager.

Please see our Disclaimer HERE.

NEW! Introducing Israel Opportunity Investor, our monthly subscription-only newsletter. Stay ahead of the game and make smart decisions in Israel stocks. Go here to learn more.

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Not wanting to be remiss in giving an update on Israel Opportunity Investor portfolio member, Alvarion (Nasdaq: ALVR), we want to chime in with our two cents. We’ve been positive on the stock and have seen our thesis — that of further global uptake of fixed mobile services — came to fruition and even surpass what we were expecting. This is a critical lesson for investors: while stocks may perform financially as planned, how they trade is another matter.

We’ve seen the stock essentially pulverized by fear of weak global markets. Telecom spending typically gets pushed out during turbulent times.

That said, Alvarion’s not seeing that yet. In fact, while we continue to think the stock has a lot going for it, we are sensing a rising sense of negativity on the stock, driving it down off of what was ultimately a good reporting season and not too bad guidance in the headwinds of a weak dollar.

An article ran in SmallCapInvestor last week after Alvarion announced earnings and looked at how analysts were sizing up ALVR’s results. The way I read the results and how Susquehanna addressed them?

• Alvarion had a Q4 ahead of estimates and saw WiMAX revenues up over 50% from 2006.
• Higher operating expenses are certainly a negative for the company but the company attributed this to a weak US dollar.

What many investors and even analysts don’t appreciate is that the dollar has fallen like a rock versus the Israeli shekel. Israeli firms like Alvarion that trade in the US and are priced in dollars but conduct R&D/production in Israel are all feeling a squeeze. We’ve heard this from numerous Israeli CEOs. When the time comes that the dollar ultimately strengthens against the shekel, we’ll see a natural reversal in these numbers. My point here is that when numbers like this are clearly attributed to fluctuations in the dollar, earnings gains/misses are not organic changes in the business model.

This same analyst report that SmallCapInvestor disparaged actually comes out pretty positive on Alvarion. Susquehanna likes the Q4 surprise, likes the WiMAX opportunity, and Alvarion’s stable of international customers. Long term investors in Israeli stocks trading in the US will find it somewhat funny to think that a particularly strong shekel is weighing on earnings.

Disclosure: Author’s fund holds a position in ALVR and is long the stock as of 2/8/08.

Please see our Disclaimer HERE.

NEW! Introducing Israel Opportunity Investor, our monthly subscription-only newsletter. Stay ahead of the game and make smart decisions in Israel stocks. Go here to learn more.

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Aaron Katsman
www.IsraelNewsletter.com

I would be remiss if I neglect to mention that tonight is my wife’s birthday. This post is serving me as a reminder that I still need to buy her a gift. Maybe I will get her a subscription the the IOI Premium Newsletter! With gold prices surging, I can’t afford to by her actual jewelry, but I can afford  to buy some shares in these 2 little-known Israeli stocks, and they are sure to be DIAMONDS in the rough.

Elbit Medical Imaging(EMITF) stock has dropped nearly 20% in the last few weeks. The real estate and bio-tech company was a big winner for investors in ‘07 and even with a slow start to ‘08, I look at ElbitMedical as a star performer this year as well. They are opening a mall in Poland( maybe I can get some cheap jewelry there) which is a continuation of their plans to continue building out the real estate holdings in Eastern European along with some new projects in India. As I have mentioned before, the real story with Elbit Medical is their very large stake in two of the most exciting private (though an IPO is definitely in the cards) companies Israel has to offer. Insightec ltd., develops a product that combines MRI technology with focused ultrasound in order to treat serious diseases such as bone, liver and brain tumors, without the invasive procedures that are currently used.  The other private company is Gamida Cell. Gamida Cell is developing, along with the aforementioned Teva,  a line of cell therapy products for the treatment of such diseases as leukemia and lymphoma. 

Jacada(JCDA) a leading provider of unified desktop and process optimization solutions for customer service operations, has been signing deals right and left and a few weeks ago announced that they were selling their Application Modernization Business to Software AGfor $26 million. They are doing this to solely focus on high growth business, to position Jacada as a pureplay in the call center solutions business. The firm provides a single, unified workspace for customer service organizations managing lots of legacy and disparate software systems. My buddy Zack”I love the Internet” Miller had a great analysisof this deal. I really think Jacada is poised to fly, and in fact with all the current selling on Wall Street, Jacada stock has actually been inching up.

Happy birthday!

Disclosure: Author’s fund holds a position in EMITF and JCDA. He has no position in any other stock mentioned as of 1/9/08.

Please see our Disclaimer HERE.

NEW! Introducing Israel Opportunity Investor, our monthly subscription-only newsletter.  Stay ahead of the game and make smart decisions in Israel stocks.  Go here to learn more.

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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