Potential Investment Opportunities in Israel and Germany

November 24, 2023No Comments

Hello and welcome to the Smart Money Dumb Money Show. I am your host, as usual, Keith Richards. I am the Chief Portfolio Manager and President of ValueTrend Wealth Management, and today we are going to talk about a couple of country ETFs that I find interesting and potential investment opportunities in Israel and Germany. Let’s get started.

Well, you might notice that I’m wearing a Porsche cap and a Porsche jacket. I have been a long-term [00:00:37] ‘buyer and holder’ you might say, of Porsche Automobiles. I’m a fan, and the company resides in one of the countries we’re going to be talking about, which is Germany. So, I want to talk about Germany and Israel – both are interesting stock charts. Israel’s been in the news a lot lately and I just want to take a look and see if there are some opportunities. So, let’s get started. I put together a bit of a slide presentation [00:01:07] for you and we’re going to share that screen.

Potential Investment Opportunities in Israel and Germany

Let’s Begin with Israel

 

So, we’re going to start with Israel. And remember this recording is usually done about a week before you actually see it. So, this was recorded on the 16th and things can change. So, just to let you know, I’m well aware that there’s a war going on in Israel and there’s all kinds of controversy in any war, but I had to copy this. You guys know how much of a fan I am of [00:01:37] our Prime Minister in Canada, Justin Trudeau, and I’m glad to see that other financial people I’ve quoted – including a couple of late that are on much higher grounds than I am on a recognition basis – are really starting to see the reality behind Trudeau. And, not just from a financial perspective, but one of the comments that Trudeau made regarding the war in Israel and the Israel [00:02:07] army attacking some of the hospitals and schools.

 

They failed to mention that that is where the terrorists have been hiding out. And as David Rosenberg says, our ‘simple-minded Prime Minister forgets that using hospitals and schools and army bases to hide behind, is more an act of terrorism than the bombing of them’. So, let’s just put that to bed, but [00:02:37] I did want to point out that there’s all kinds of controversy, but where there’s controversy, there can be opportunity because Israel sold off.

 

Now, I’m going to get into the Israel chart in a minute, but I wanted to give you a big picture of another opportunity that we should be paying attention to. You probably saw my recent video on the TSX. I talked about how beyond a very tight trading range, I think the TSX doesn’t have a lot of upside. Largely because of government decisions [00:03:07] made over the past six or seven years. You can see that in the chart. It’s not magic here, and it’s not just my disdain with the current Canadian government. It is the reality that our market is not doing as well as other world markets for a reason.

potential investment opportunities in Israel and Germany.

We actually have a resource that is being squashed that is very important to our country. And, what’s happened is the US dollar has moved up against a lot [00:03:30] of different economies including Canada’s – but one of the things I want you to notice is that the US dollar tends to move within consolidation patterns pretty frequently, and we’re in one of those right now. So, you can see them in the past, but currently, the US dollar on a worldwide basis, so this is against world currencies, is trading between about 100 and 106, let’s call it. And it’s just bounced off of that high and it’s heading its way lower.

 

Obviously, it’s just started [00:04:00] that down move. I very much believe that you’re going to see the US dollar decline by 5% or 6% or a minimum of 4% from current levels to get back to that support level around 100, it’s around 104 right now, so let’s call it a 4% decline. But I think this is a highly probable move, and that matters to us because if we invest in a foreign exchange or foreign stocks, say an ADR that’s listed on the stock exchange, you’re going to get a [00:04:37] 4% bump in the currency against the US dollar.

 

Well, we’re Canadian, so we think in terms of Canadian dollars, but the Canadian dollar, as I’ve mentioned in prior blogs and videos is probably going to be pretty pathetic over the next little while. It’s been stuck at 72 cents since March of 2023, and I really don’t see it moving much beyond a penny or so off of that. So, you’ve got real opportunity, I think in the US dollar [00:05:07] moving lower because other currencies probably with the exception of Canada’s, will move higher on a relative basis. So, this chart is telling us that.

 

Why does that matter? Let’s look at the Index Breakdown, Valuations and Charts.

 

Well, why does that matter? Because Israel is a country outside of the US. Now, I want to look at the index breakdown. I’m going to look at Israel and then I’m going to look at Germany and I’m going to look at some of the same factors, which is the index breakdown and the valuations and the charts. So, let’s take a look at [00:05:37] Israel. Israel has a very solid technology sector, not as heavily weighted as the S&P 500’s indexes in the sector, but still around 17% of the index. Why does that matter? Because some of the technology stocks in Israel are real groundbreakers, real solid entrepreneurial companies and they’re not [00:06:07] getting the massive valuations of the US equivalents.  So, let’s take a look at that.

Potential Investment Opportunities in Israel and Germany

Israel: The TA-35

The Tel Aviv 35, which is their main index, only has 35 stocks in it, but it’s down at the 11th percentile in so far as its historic price range. In other words, it’s in the lower 11% of its price metrics, its valuation metrics as far as cheapness [00:06:35] goes, and this goes back to 2008. Currently, for example, the price-to-sales ratio is 1.3 times and the PE is 10.2 times. Compare that to the S&P, which is effectively double at 2.5 times price-to-sales and more than double for the PE ratio, 24.8. So, keep in mind that  Israel is in a smaller economy and emerging market, so you can’t really apply the exact same metrics, but I mean more than double does [00:07:00] not make sense, especially with what we’re seeing as far as the earnings and growth and long-term aspects of Israel.

Potential Investment Opportunities in Israel and Germany

So, let’s take a look. You might be wondering right now, well what about with the war? What are their earnings going to be like? Well, half of the earnings on that index come from foreign parts of their business, so they really [00:07:30] get most of their revenue or a good chunk of their revenue from outside of the country. And another interesting factor that I read (gained from Rosenberg Research) was that their growth is going to decline even with all war worst-case scenarios priced out at less than 1% over what they saw last year. So, they’re definitely not in a growth decline much at all, despite the war. That is because of their diversification of earnings. [00:08:07] So, some of the companies that come out of Israel, I looked up ‘Wayz’ is one as me as a driver with my Porsche hat on here. Wayz is an app that is used by many, many people.  I am sure that you might have used it yourself, tells you not just what a standard GPS tells you, which is here’s where we’re driving, but it’s got all kinds of on-the-fly information that individual people driving their cars punch in as they drive, [00:08:37] there’s a police officer up ahead, there’s an accident up ahead, there’s an obstacle on the road, whatever. It’s really good stuff.

 

Waze was sold to Google, but there’s Checkpoint software, Wix, and a number of others that are real groundbreaking companies and they’re selling on the cheap. When compared to some of the tech stuff in the United States, here is the long-term chart of the TA-35 and you can see that it’s been in an uptrend for a very long time. Sure, it’s got consolidation periods [00:09:07] and it had a pretty big one here. And that level of resistance, which was hit many times, acted as support recently in the market selloff over 2022. It recently broke that with the war. And unlike the S&P 500 and other indexes, it has not moved back to break out of that down channel that you can kind of see here. It’s still in a down channel, [00:09:30] but I feel that if it breaks to the upside of this old trendline, or resistance line, if it breaks to the upside, it’s a very positive thing for this index. So right now, I do not own in Israel index the TA-35 ETFs and whatnot. I don’t own any stocks from that country, but I am very, very intrigued based on everything I’m seeing here. If you see it break out, I think it’ll be pretty interesting. [00:10:07] So let’s keep an eye on it.

 

Potential Investment Opportunities in Israel and Germany

Potential Investment Opportunities in Israel and Germany

Germany and the DAX

Germany, I want to talk about the DAX. Many of you know what the DAX is. It’s very highly diversified, it really doesn’t have a massive overweight position. Again, comparing to the S&P and its technology sector in an overvalued part. It’s got a big position in Siemens, which is an industrial type of stock, but it’s really quite diversified. You can see others at the bottom is [00:10:37] a plethora of different non-segregated types of sectors that they’ve shoved into one sector, so to speak, one multi-diversified sector. It is pretty spread out and I like that because I am very concerned about the over-concentration on the S&P 500. Let’s look at the fundamentals. Take a look at this. The current PE of the DAX is 12.5 and its historic average is 25.

Potential Investment Opportunities in Israel and Germany

[00:11:07] And remember, 25 is roughly where the S&P 500 sits as far as PE goes. So, the price-to-sales is 0.84. Remember, we were just looking at Tel Aviv thinking that was cheap at 1.25 I think it was. Well, the price-to-sales in Germany is 0.84 and it’s a developed market. This is not a developing or emerging market. This is a big world market and it’s at 0.84. So, compare [00:11:37] that to the S&P, well over double from the price-to-sales.  (Price-to-sales is: you pay a price and gross sales are what the company produces.) Well, you’re paying an awful price on the S&P 500 for earnings and sales. So, the DAX index is only 40 stocks, but they’re much less concentrated than the S&P. You could almost say that the S&P is kind of like 40 stocks because a massive chunk [00:12:07] of them is concentrated in just a few names.

 

 

Our Position in the EWG ETF

 

So, let’s talk about the stock chart, in a long-term uptrend since 2009, you could really go back to 2005, but that trendline is a little neater going back to the crash of 2009, and you can see there’s a bit of resistance coming up. We are in the EWG ETF that I’ll talk about in a minute. We do hold the position and we’re looking at it as a trade [00:12:37] back to the old highs. So, the DAX itself has a high of around 16,500. It’s currently I think around 15,700 or so. We think there’s maybe a few several hundred points left in the index and we are looking at it as a trade. But if you’re a long-term investor and it broke that old lid of around 16,500, then there could be a substantial upside from here. And it is really coming down. It came down to the trendline, which is one of the reasons we liked it. It also hit a near-term [00:13:00] support level here. It’s harder to see on this chart, but we started buying it on that balance and we do think it’ll get to the top of the range from there, who knows? But we like that trade for many reasons, including the valuations.

 

So, in the near-term, we think that there is a short-term potential for Germany. We also think there might be potential long-term, but our view is more for a short-term trade. Israel, it’s very oversold. It’s below its [00:13:37] old resistance, new support level. So, we’re not buying it right now, but I do recommend you keep your eyes on it for a potential trade. Both are super cheap from a fundamental perspective. Their price earnings, their price-to-sales, their historic valuations comparatively versus their own index, forget against the S&P, are cheap. So, we really like the metrics of these two [00:14:07] indices.

 

The Risks and Potential Rewards of Israel-based Trades

 

When we are considering potential investment opportunities in Israel and Germany, again, there are certain risks with Israel that I need to caution you on, and certainly from a technical perspective, it hasn’t broken out yet. But, if you like the S&P, then you’re going to have to like Germany even more, I think. The longer-term play may be there, especially if the old highs are taken out, or in Israel’s case if that level of former consolidation is taken out. We also think that the US dollar has [00:14:37] got a very, very, very high potential to weaken, I think by 3, 4, 5% easily. And if that’s the case, then just owning anything BUT the US when converted US dollars is going to be probably a 4% win for most of us. And because of the Canadian dollar, I don’t think it’s going to move much at all, I think it’s a double win.

 

We just have so many reasons that we like these two areas, although [00:15:07] again, we do not own anything in Israel at this point. We do disclose that we hold EWG, but I’m not making this as a recommendation. We bought it a little cheaper than I’m talking about here, but I still think it might have some more upside. You have to do your own work as always. Don’t take my word for it. You’ve got to do your own work.

 

So. thanks for watching this video on the potential investment opportunities in Israel and Germany, and I hope this makes sense. The car’s away for the winter. I’m back to just [00:15:37] driving the family wagon, but I’m looking forward to next summer and hoping to add to Germany’s economy through my enthusiasm for their cars. You have a great day and we’ll see you next week.

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