Taking Stock / Scorning Teva

The 180-percent leap by securities that El Al issued has been setting the mood on the Tel Aviv Stock Exchange these days. After three years of decline, the airline's offering was a happy reminder to addicts of speedy gains that they can win on the market - and not only lose.

But the really eye-popping story on the TASE in recent months isn't El Al; it's a company whose market value is 100 times that of the airline, a company whose shares have soared this year by 45 percent, in dollar terms, a company whose market capitalization is nearing $15 billion - more than a quarter of all the companies traded in Tel Aviv totaled together.

Teva Pharmaceuticals has been gradually disappearing from all frames of reference in the local market. During the days of the high-tech bubble, while Check Point Software Technologies, Comverse Technologies and Amdocs were trading at company valuations in the tens of billions, Teva was seen as part of a general phenomenon. Today, it is the exception that proves the rule. It is a rare example of an Israeli company that exemplary management has transformed into a multinational - with annual revenues of $2.5 billion, and profits of $400 million a year.

Teva has had a tremendous impact on the world of Israeli management. Perched far, far above the madding crowd, it proves that geographic remoteness and an Israeli identity do not have to hamper companies armed with vision, strategy and the ability to turn them into reality.

Do stocks really generate the highest yields?

But Teva has had another influence too - one that is less widely discussed, but one that is highly significant for the Tel Aviv stock market. Mainly, it affects the way the stock market is perceived.

Every Tom, Dreck and Harel on the market knows the marketing mantra for stocks: "In the long run, stocks generate the highest returns on investment."

Slightly more experienced market animals et al know that in the case of the Tel Aviv Stock Exchange, however, said long-run yields aren't particularly impressive - over the last seven years, the Maof-25 index has generated average annual real yields of 5.5 percent, which isn't much more than a savings account would have provided. And this number includes the recent spate of gains.

But what we tend to forget is the tremendous contribution of Teva to the TASE yields. Although the stock market confined its weight on the Maof-25 index to 9.5 percent, to prevent the index from becoming overly distorted, the drugmaker's astonishing yields has made it the main engine driving Tel Aviv's indices, which are the main yardsticks for measuring the market.

Here are the figures. In the last seven years, Teva stock has gained 600 percent, while the Maof (the TA-25 index) has risen only 100 percent.

Meaning: 60 percent of the index's increase is due to Teva.

The low real yield of the Maof-25 index in the last seven years - 5.5 percent - would have been less than 3 percent if not for the mighty pharma.

Not just an exercise in algebra

Here is another toothsome fact: The Maof-25 index has risen 25 percent in the last five years, in real terms. But if Teva's contribution is subtracted, it dropped 15 percent.

Everybody knows that the Maof-25 index is cruising close to its peak, at 440 points. Less widely known is that without Teva, it would today be at 230 points.

The point of all these figures isn't to indulge in algebraic exercises. The point is that they should substantially affect investment decisions in Tel Aviv securities.

First of all, we learn that Teva emanates a rosy glow that encompasses the other companies traded in Tel Aviv. It inflates the total value generated by the aggregate of the companies. Without it, Israel's biggest firms, from the banks to the holding companies to the industrial concerns, look a lot less impressive regarding value creation in the past, and possibly in the future too.

Secondly, we learn - again - how dangerous it is to "choose" investment portfolios rather than buying a market portfolio, which is based on the stocks comprising the index, and gets updated with the change in the companies' relative weights. Anybody whose portfolio did not include Teva in recent years, or whose portfolio underweighted the drug company, had terrific trouble beating the Maof-25 index.

Indeed, a check of the performance of mutuals in Israel and around the world shows that most failed to beat the indices, hence the remarkable success of the index funds in the U.S.

Israel's mutuals managers learned the lesson. Today, most have hefty proportions of their portfolios devoted to Teva. One would have to particularly cocky to buck the market and indices, and ignore the mighty company.

Naturally, the day Teva stumbles, it will drag the Maof-25 index violently and quickly down. Teva CEO Israel Makov bears huge responsibility not only to the company's shareholders, but to the entire Israeli marketplace. A breakdown at Teva could shake up the entire Tel Aviv Stock Exchange, sparking panic and chaos. With a market cap of almost $15 billion - 10 times its shareholders equity and six times its sales - one could get a major case of vertigo with the share. But everybody who has bet against it, so far, has retreated in humiliation and tears.