Last week was the best trading week on Wall Street since the start of 2023. The indices, which peaked in the summer, then tailed off but have rallied since October. Last week's strong rises continued this week and the S&P 500 Index is up 6.3% over the past week, the Dow Jones Index is up 5.4% and the Nasdaq has jumped 7.9%. For the Nasdaq and S&P 500 this is the largest sustained rise since 2021.
These strong gains have included some of Israel's tech companies, which have risen by double-digit percentage points, usually after reporting strong third quarter results. These stocks include digital insurance company Lemonade (NYSE: LMND), and software companies JFrog (Nasdaq: FROG) and Audiocodes (Nasdaq: AUDC; TASE: AUDC).
What is causing this bullishness on the US market? Oppenheimer senior equity analyst Sergey Vastchenok says, "The main factors is the focus on the third quarter reporting season. Overall, the companies are 'delivering the goods'. From the reports it appears that there is no recession and no crisis and not a single company that reported has talked about a recession, on the contrary. In other words, it does not seem that the economy is on the way to a recession, as the macro-data also indicate."
Vastchenok points out that good macro-data has a negative effect on US Federal Reserve policy because it increases the fear that the Fed will be more aggressive, especially in view of the rise in oil prices. "The Fed is relatively calm," says Vastchenok. "At the same time, there has been a decrease in yields in the US bond market recently, and this is a significant factor in the improvement of the stock market, because if bond yields are high, it lowers the viability of investing in the stock market, and vice versa."
"Investors see light at the end of the tunnel"
Vastchenok adds that among reasons for the Wall Street rises is also the perceptions regarding the war between Israel and Hamas. He says, "There is the fear of an escalation in the Middle East, a fear that Hezbollah and Iran will join and lead to the expansion of the war to larger powers, which could lead to a deterioration. I think that the worst scenario has not yet materialized, and right now in this market it is perceived that there is some kind of relaxation. As long as it is only Gaza, it is apparently an internal matter for Israel."
He adds, "Furthermore, even in Russia-Ukraine there are already voices calling for an end to the war."
If so is there room for further rises?
Vastchenok says, "Stocks are cheap. We saw a fall in pricing and then an improvement in guidance forecasts in the third quarter reports, so overall the environment looks quite reasonable. It is important to remember that most of the rises on the NYSE since the beginning of the year and now are concentrated in a small number of tech companies and large growth companies. Most of them published very strong reports - Amazon, Facebook, Google, Microsoft. Apple published a reasonable report. Investors see light at the end of the tunnel and are more confident that the recession can be avoided. This is the biggest concern, and it will be the concern in 2024 too.
"In my estimation, by the end of 2023 the market can rise, but 2024 is a bit more challenging, because a presidential election campaign is expected in the US, which is an issue that raises the uncertainty."
A headwind from the general market, and low pricing
Stocks that have stood out in the rises over recent trading days have included Israeli companies, which benefited from the bullish market after publishing good financial reports. For example, the two digital insurance companies Lemonade, which has jumped by 59% and Hippo (Nasdaq: HIPO) which has risen 32%. Audiocodes, which deals with corporate communications software, has climbed 36% and J. Frog, which provides solutions for continuous software updates, has risen 22%. There are also Israeli companies that have not yet reported but benefited from a positive trend, including Enlight Renewable Energy (Nasdaq: ENLT; TASE: ENLT), which has risen 23.3%.
Vastchenok believes that these strong rises have come about because of the previous particularly low pricing of these stocks. "Pricing plays a significant role," he says. "Audiocodes, for example, is very cheap. It arrived at a very low pricing, when today it is among the cheapest Israeli companies with a single-digit EBITDA multiplier, and a cash reserves that make up a third of its value. It is really undervalued. Audiocodes reports on the whole were in line with expectations. They probably thought in the market there might be some kind of catastrophe because of the hardware activity, but I think people miss that this is no longer a hardware company. It used to sell a lot of equipment, but today it has much more software, while the hardware makes up 20% of the business."
Generally speaking, he says, most of the Israeli companies that have reported so far have not landed any surprises including JFrog and cybersecurity company CyberArk (Nasdaq: CYBR), which has risen 15% over the past few days. Business systems software company Amdocs (Nasdaq: DOX), which has lower than expected guidance for 2024 but has raised its profit levels, looks a cheap stock.
monday.com, which reports next week, "Could move ahead strongly"
Looking ahead, Vastchenok recommends paying attention to Israeli work operating systems (WOS) company monday.com (Nasdaq: MNDY), which reports next week.
He believes, it will publish a good report, "It is growing very strongly, and operates in a huge market. It has a very high cash flow rate, and at the same time its stock has fallen since the start of the war (although it has risen in the last week and a half). If there is a surprise in the reports as it was in the previous ones, monday's stock can move ahead strongly."
Vastchenok stresses, "The rise in the stock is more related to growth. A company whose stock is cheap will not rise just because it is cheap, but because there is some positive turn in the business - acceleration of growth, improvement in profitability, a more positive direction forward."
He adds that so far, all the Israeli companies that have reported said that there has not been damage to their businesses due to the war. Some of them listed the percentage of their employees who are in the reserves, and according to him, in the more technology-oriented companies, this is around 10% of the workforce in Israel. "It's not a lot, but it shouldn't affect their businesses in the short-medium term," he believes.
Published by Globes, Israel business news - en.globes.co.il - on November 9, 2023.
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