Yesterday, I initiated a series of articles about representative stocks in niches that are worth investing in over the next 5-10 years. Yesterday, I covered the military electronics sector, and I picked Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT) as the representative stock.
Today, I will discuss alternative energy, in other words, alternatives to oil and coal. The current main alternative energy sources are wind and sun, and of course, natural gas. There are no public Israeli companies in these three sectors. Don’t misunderstand me; Israel has know-how, willingness, and plenty of money for investment in these fields, but for reasons that can only be understood in the context of the Jewish people, an Israeli alternative energy industry is simply in the doldrums, and even in retreat. If the government were to designate the main two greentech sectors - water and energy - as national projects, there is no doubt that the local investment and employment situation would be different.
Israel has Ormat Technologies Inc. (NYSE: ORA), which develops geothermal energy sources. I for one considered it to be one of the most promising Israeli companies in general even before its IPO, and I now consider it one of the most promising in New York.
As far as I’ve been able to check, Ormat Technologies is a leader in the growing geothermal energy industry. It has everything needed for inclusion in a long-term investment portfolio. It has exceptional management, leading technologies, and, as I said, a growing niche. My only problem with the company is that geothermal energy cannot be an exclusive alternative to oil.
Among the interesting companies for the next 5-10 years, I’m trying to focus on those in key niches. In other words, if I approach and investor and say, “I have a share for you that represents a company that can change the dependence on oil,” it won’t be Ormat Technologies. At the moment, I have no choice but to rely on exchange traded funds (ETFs) such as PBW, that represent baskets of alternative energy stocks. These ETFs include 43 companies in a wide range of alternative energies, including Ormat Technologies and Medis Technologies Ltd. (Nasdaq: MDTL).
By the way, it turns out the Wall Street is demonstrating utter ignorance and illogic as far as alternative energy is concerned. It turns out that alternative energy stocks, Ormat Technologies included, move in tandem with crude oil prices. This is clearly seen in the ETFs. The price of a barrel of crude oil reached an all-time high of $80 in late May and early June, and has since fallen 25%. The PBW ETF has fallen 29% over the same period. So has Ormat Technologies, although it corrected thanks to the company’s performance. Medis Tech fell 44% in the same period, and is now rising thanks to the stabilization of oil prices.
Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) is now at a very special point that gives it a chance to continue as the generic drug leader. I pick Teva as the most successful healthcare stock over the next decade for investors, although my gut tells me that the company will no longer exist as an independent entity within 3-5 years. I’ll explain below.
The strategic direction of the pharmaceutical industry is such that I think that, sooner or later, pharma and biotech giants will enter the generics industry, and I think that Teva will be one of the platforms for this entry. I write this in view of another impressive report about Copaxone sales and on the eve of the publication of Teva’s financial report for the third quarter, which is expected to be excellent.
Over the last 20 years, Teva has demonstrated in the most perfect way what a small Israeli company can do. It has become an empire that develops, manufactures and markets (mainly through a marketing network and working relations with distributors) leading generic products. It also fully developed its ethical drug Copaxone from the concept stage through marketing.
At the start of the millennium, Teva entered generic biotechnology, a sector that has not yet been born (I estimate that it’s in its eighth month), in a very calculated way. All the acquisitions and non-acquisitions by Teva have been part of a strategy. Most importantly, the company has learned over the years how to grow through smooth acquisitions, meaning that they were successfully completed on time and as planned.
This is not easy, ladies and gentlemen. Ask nine out of ten Israeli buyers why their acquisitions failed even though everything seemed excellent on the surface. What I want to say is that Teva, thanks to its superb management headed by Eli Hurvitz and then by Israel Makov, is a well-oiled business machine whose effectiveness and development capabilities on one hand, and marketing power on the other ensure that the company will stay the leader in generics, a field that will only grow.
Over the past year, Teva has fallen from $45.90 to $29.20. It has slid even though everyone is sure that 2006 will be a record year in terms of sales and profits. The share has fallen for two main reasons. First, was the peak price it reached in late 2005. Second was the media. I once wrote that since Teva rose to become the generic market leader, its life would get harder; it’s not easy to stay on top.
However, if we compare the share’s situation with Teva’s business, only one conclusion is possible: Teva has never before been traded at such a low value. One important factor for the pressure on the share is, as I said, the media, because if you check all the announcements since the share hit $45.90 and until now, you’ll realize that there is no business reason for the slide, except for all kinds of baseless and illogical commentary from rumormongers of one kind or another. Hence the so-called disappointment about the Copaxone sales numbers published yesterday.
Teva will be sold
I have a simple and clear opinion about Teva. It will have few problems on Main Street, but many on Wall Street. First, it will take analysts a year before they decide who incoming CEO Shlomo Yanai is. Second, the analysts are still angry at Makov and Hurvitz for not consulting with them en route to the decision. Third is the problem of “Teva’s performance in 2007”, an odd problem that could only come up on Wall Street.
Teva, according to the experts and analysts, as well as Makov, will show record sales and profits in 2006. What’s wrong with that? What wrong is that if “2006 is the best year in Teva’s history”, say the experts, “what will 2007 be?” I have no answer to this.
The last subject I will raise is generic drug sales by Wal-Mart Stores Inc. (NYSE:WMT). Will they or won’t they hurt Teva? In other words, every good day for Teva’s share in the foreseeable future guarantees a subsequent bad day on the basis of “What will happen if…?”
Therefore, this is a good time to buy Teva shares. How long with this last? I have no idea, but it’s hard for me to see the share climbing to new, higher, heights. So why do I recommend Teva as the healthcare share of the decade?
The reason is simple: if all is well on Main Street and all is anxious on Wall Street, the end is known. Main Street will win, although I have no idea when. I only know that it will. Besides, I told you, Teva will be sold, maybe to Novartis Pharmaceuticals (NYSE: NVS; LSE: NOV; SWX: NOVZ) intend or Pfizer (NYSE:PFE; LSE:PFZ), or maybe to a large private group, so don’t “sit on Teva”?
By the way, anyone wishing to know a bit better what could be in Teva’s future, ought to read Aaron Smith’s October 31 article in CNNMoney “The big threat to Big Pharma”
Published by Globes [online], Israel business news - www.globes.co.il - on November 1, 2006
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006