World stock markets soared on Wednesday after a German court gave its blessing to the EU sovereign debt bailouts. The Dow finished the day 275 points higher, and the standby safe havens—Treasuries and gold—fell sharply. As much as I’d like to believe that the gut-wrenching volatility that plagued us throughout the month of August is over, I know better than to tempt fate and say it. September is often a rough month for the markets, and given the gloom that seems to pervade everything these days, we may have more of it coming.
Still, when you buy the right stocks at the right prices, any temporary price dips should be viewed as a buying opportunity. And today, I see plenty such opportunities in one of the hardest-hit regions of the world—the Middle East—and specifically in the erstwhile allies (alas, now enemies) Turkey and Israel.
In addition to the same turbulence affecting all world markets, unrest stemming from the “Arab Spring” has added an extra layer of uncertainty, and the stock markets of non-Arab countries in the region—such as Turkey and Israel—have been dragged down with their Arab neighbors. Both Turkey and Israel share a border with Syria, the latest Arab country to see a popular revolt against the ruling autocratic regime. But more worryingly for Israelis, the Jewish state also happens to border Egypt, the most populous and most strategic Arab country. Israel’s continued security and prosperity relies on Egypt staying at least relatively stable.
Given the uncertainties surrounding the region (and on the global economy in general) I recommend steering clear of companies that depend heavily on exports or tourism. But I would feel comfortable investing is essential goods and services and in particularly mobile telecom. Even if low-level war breaks out and spills across their borders, Turks and Israelis are not likely to curtail mobile phone usage. Yes, some amount of phone infrastructure would be destroyed and all stocks would fall at least temporarily due to investor flight. But once the dust settles, it would be business as usual for these companies. And at current prices, we’re being compensated to take the risk.
I’ll start with Turkish blue chip Turkcell Iletisim Hizmetleri AS (NYSE: TKC). Turkcell is the leading mobile provider in Turkey (market share of 56%) and has a large and growing presence across Eastern Europe and the Middle East. It has 62 million subscribers, making it the third largest mobile provider in Europe and a dominant player in the Middle East as well.
Turkcell sports a safe dividend yield of 5.4% and trades at a P/E ratio of only 12. This is a high-quality company with a Western-educated management operating in one of the most promising of the up-and-coming emerging markets. When emerging markets as a group shake out of the funk they have been in for most of 2011, I expect Turkish stocks to lead the pack. And I expect Turkcell to be among the biggest winners. And given the solid dividend, you’re getting paid to wait.
My next recommendation is Israel’s leading mobile provider Cellcom Israel Ltd (NYSE: CEL).
Cellcom is a smaller company operating in a smaller market; its subscribers base totals just over 3 miilion. Still, Israel is one of the premier technology hubs in the world, and Cellcom provides essential services to make it all go. It also happens to be shockingly cheap. Cellcom trades at a price/earnings ratio of less than 7 and sports a dividend yield of over 10%.
It may seem an odd thing to say, but Israeli stocks have many of the same characteristic as “vice” investments. (See “The Price of Sin”) For ideological or public relations reasons, many large institutional investors are forbidden from buying shares in tobacco, alcohol, gaming, or even defense stocks. No charitable foundation or university endowment wants to be seen as profiting as a merchant of death. The result is that vice stocks end up trading as perpetual value stocks, offering investors cheap earnings multiples and high dividend yields. Investors who are free from political correctness can do quite well in these areas.
Similarly, Israel’s unique security situation in the Palestinian territories makes it a bit of a political lightning rod that causes many investors to stay away, and Israeli companies generally trade at an “Israel discount.” Many a university endowment fund manager has grown weary of being lectured by activist faculty on the evils of appearing to endorse “the occupation.”
I have no interest in discussing the rights or wrongs of Israel’s Palestinian policy. In the Sizemore Investment Letter, our beat is finding profitable investments, not earning ourselves Nobel Peace Prizes. Israel is a prosperous and innovative country that is priced to deliver above-average returns in the years ahead, and Cellcom Israel is a great way to get exposure.
At current prices, both Turkcell and Cellcom could easily double in the next 12-18 months. But even if I am wrong, investors can earn a handsome cash return on the companies’ dividends. In a world in which 10-year government bonds yield barely 2% and the average stock even less, Middle Eastern telecom would seem like a smart bet.
About the author:
Mr. Sizemore has been a repeat guest on Fox Business News, quoted in Barron’s Magazine and the Wall Street Journal, and published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures and Options Magazine, and The Daily Reckoning.