Investment Manna in the Middle East

Israel has become a huge economic success story despite getting off to a rough start more than 60 years ago.

Surrounded by hostile neighbors, the country fought five wars in the first two decades of its existence. Then, after securing its position in the region, it battled hyperinflation with annual rates as high as 950 percent in the 1980s.

While the violence in Israel has subsided, the country is still no stranger to controversy and strife. American actress Scarlett Johansson was recently forced to step down as an Oxfam ambassador after accepting an endorsement deal from SodaStream International (NSDQ: SODA), an Israeli company whose manufacturing plant is in the West Bank, and occasional bombings and gun attacks are still a fact of life there.

There are still other problems. Bank of Israel Governor Karnit Flug has said the country must reduce spending by ILS12 billion and find another ILS8 billion in tax revenue to reach its 2015 budget deficit target of 2.5 percent of gross domestic product. The central bank's annual report also points out that a red hot housing market and a high poverty rate must be addressed.

Still, the country learned its economic lessons from its early history and has come to be hailed as a successful "start-up nation," fostering businesses such as SodaStream and a host of others, thanks to friendly regulations and strong fiscal and monetary policies.

Israel also began production of its offshore Tamar gas field, making its first delivery of natural gas just a few days ago. The field is expected to deliver about 985 million cubic feet of gas per day, or about 10 billion cubic meters annually. Development of the field added 1 percent to the country's economic growth last year and is expected to add 0.3 percent this year, a figure that should rise as more customers for the gas are secured.

Those efforts are already well underway amid a noticeable thaw i! n Israeli-Turkish relations over the past year or so, with the two countries considering the construction of a pipeline to move some of that gas to Turkey. Not only would that sort of deal boost the economies of both countries, it would also lay the foundations for friendlier relations going forward.

Thanks to the country’s proactive steps to address economic concerns and its commitment to business and development, Standard and Poor's (S&P) recently affirmed Israel's "A+" credit rating and has begun ranking the country as "high income." S&P also said that it expects the country's annual per capita income to rise from its current level of about $38,000 to $42,000 by 2017. Just five years ago the average income was just $28,000.

Unlike dicier situations in many foreign markets, Israeli-US relations have been close for decades now, helping to make it easy for US investors to access Israeli stocks. In fact, Israel-based companies are the third most listed on US exchanges behind China and Canada. In 2013, about half of all the Israeli companies listed in the US ended the year with gains of 30 percent or more and, after the flat first quarter, most of them are outperforming so far this year as well.

One of my favorites is Caesarstone Sdot-Yam (NSDQ: CSTE), which manufacturers premium quartz surfaces for countertops, bathrooms, tables or just about anywhere you'd want a quartz surface.

While the company was founded in 1987 it has only traded on the NASDAQ since 2012. Since then its share price has more than quadrupled, driven by earnings growth of more than 14 percent. Since 2009, the company’s annual revenue has grown from $162.6 million to $356.6 million last year.

About 35 percent of the company's total sales last year were in the US, where Caesarstone purchased one of its primary competitors and its distributor. A quarter of its sales were in Australia, 14 percent in Canada, 12 percent in Israel and 6 percent in Europe. The remainder ! falls int! o a broad "rest of world" category.

Caesarstone has benefited from a comprehensive marketing strategy that doesn't rely on a single sales channel; you'll find its ads in consumer magazines and on television, at tradeshows for builders, sales reps visiting architects and a host of in-store displays. It also benefits from having a widely acknowledged superior product protected by technical know-how that helps the company to outshine competitors.

Given the improving pace of economic growth in Israel and the spur it provides to both home and commercial construction, Caesarstone's sales growth should continue its upward trajectory for at least the next few years. The company is anticipating this future prosperity; it recently added a fifth Israeli manufacturing line in the second quarter of this year and plans a US plant sometime next year.

Caesarstone Sdot-Yam rates a buy up to 61.