Four Undervalued Israeli Small Caps

by: Shlomo Greenberg

Four Israeli companies which are, without doubt, trading at prices lower than their value primarily due to lack of interest are Eltek (Nasdaq: ELTK), Top Image Systems Ltd. (Nasdaq: TISA), Mind CTI (Nasdaq: MNDO), and BluePhoenix Solutions Ltd. (Nasdaq: BPHX).

Despite being in different lines of business, all four companies have one thing in common. Since 2003, they have all enjoyed growth in both sales and profits. Therefore, in principle, the problem with these companies does not lie in current business ability but in their ability to attract the attention of investors.

I’ll start back in October 2002, the lowest point in the bubble crisis. All four companies hit the following lows. BluePhoenix fell from its high of $17.25 in February to $2; Eltek fell from $9 in February 2000 to $0.40; Mind fell from $10.5 to $0.77, while Top Image fell from $11.5 in February 2000, to $0.50 in October 2002.

At the end of 2002, Wall Street began to realize that the slowdown was drawing to a close, and that the pouring of big money into the system was creating demand. Stocks, especially those of the technology companies began to rise sharply for two reasons: firstly investors remembered that companies like these have double digit growth, and secondly there was a feeling that these companies had fallen by too much.

Of course, both these assumptions were wrong. Technology companies also had double digit growth in the past. By 2002 they had already become part of the good old economy. Technology stocks had not fallen by too much but they did rise too high in 2000. But Wall Street, being Wall Street, is not one to pass up the chance of a party, even if the reason isn’t all that appropriate. Thus, nearly every single company that survived 2000 was swept upward in the excitement that descended on the market as the big economic crisis drew to a close. Between 2002 to the first quarter of 2004, Eltek soared 710%, Top Image rocketed 1250%, Mind powered 875% while BluePhoenix jumped 400%.

At the beginning of the second quarter of 2004, the gains ground to a halt and investors began to re-examine the entire situation. The indices have been climbing since the second quarter of 2004 to the present day, albeit cautiously with a lot of volatility along the way. The Nasdaq fell 12.5% in 2004 and then gained 17% at the beginning of 2005. By the end of the first quarter of 2005 it had fallen by more than 9% and then changed direction again, climbing 25% by May 2006.

Taking BluePhoenix as an example, we will discover something very interesting: if in the not-so-distant past - after the recovery of October 2002 - the shares used to go up before the company published its reports, in the past year the shares have been falling after the reports were published, whether the reports were good or not.

Why is this? I think it is because the investors are waiting for an exit, period. All four of the companies issued great reports for the second quarter of this year, and all four of them dropped immediately afterwards.

This means that these falls have created some really good prices. All four companies posted record sales in the second quarter of this year. BluePhoenix operates in the difficult field of software upgrades for IT systems. Note that the company’s market cap has fallen from a four-year high of $118 million at the beginning of 2004 to less than $78 million today. The other three companies have also seen similar falls.

So should you rush out and buy these shares? No. Today, you don’t rush out and buy anything. You need to decide what you believe in, what you like and what field you personally find more interesting. Of course, you also need to believe that the management will make your dreams come true. Only then you should make your move.

Published originally by Globes [online], Israel business news - © Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.