Taking Stock / Teva!

Teva Pharmaceuticals. There is no other like it.

There is only one Israeli company that has managed to evolve into a genuine, real McCoy multinational with subsidiaries scattered around the world.

There is only one Israeli company that over the years has spent billions swallowing up other companies.

There is only one Israeli company in the pole position of a market worth tens of billions of dollars.

There is only one Israeli company whose shares have risen 1,200 percent in the last decade.

There is only one Israeli company for whom a moderate share price slip, just 15 percent, in the last couple of months, could cause $3 billion in value to evaporate.

Many investors in Teva discovered a new fact of life in the last month. Teva is, despite all, just another share. It can rise. And it can fall.

Trivial, isn't it? Teva is a company operating in a competitive environment. The market prices its goods, its managers are but flesh and blood, it takes calculated risks, and just as it succeeds, it can come a cropper.

Yet it transpires that many investors in Israel don't grasp that Teva isn't just a unique Israeli multinational, it's also just another share. They think Teva shares are akin to bonds - that they have some kind of stop-loss mechanism, that one might lose a few percent here or there, but over time it can only gain and gain and gain.

They have anecdotal evidence, too. Since Teva became the most popular share in Israeli investment portfolios a decade ago, hardly a year has passed without the share gaining ground, and a lot of ground. Here and there were a few unfortunate episodes when the entire Tel Aviv Stock Exchange sank, but that's about it.

That 1,200 percent leap in the last 10 years and 500 percent in the last five years has created not a few Israeli millionaires, some of them very heavy ones. The list would have to start with Eli Hurvitz, who accrued $300 million worth of shares; Sami Shamoon built up half a billion from his little investment in the 1980s; and a long line of Teva managers found their livelihood and that of their grandkids secured by Teva stock options. Then there are the heirs of the company's founders, such as Ruth Cheshin, who received more than $100 million worth of Teva stock from her parents.

There is also the legendary Arie Adler, who bought a 2 percent stake in Teva 15 years ago and clung grimly to the stock, even when doing time for securities offenses. He used every dividend to buy more Teva shares and today he's on the TheMarker Magazine list of Israel's 500 richest people, even though he steadfastly refuses to say how many Teva shares he has left - $100 million worth? A quarter-billion dollars' worth?

There are a whole slew of little investors for whom Teva is a fact of financial life, people who bought the stock in the first half of the 1990s. If they bought a few tens of thousands worth of its stock back then, it's now worth hundreds of thousands. Some have become very wealthy indeed.

And most slept well at night - until a few months ago. From time to time Teva had lost 5 percent or even 10 percent, this is true, but they were confident it was a dip, a blip, because this is Teva, the best company in Israel with its legendary management, with its four eye-popping financial statements a year, Teva, to which the adulatory press has attached every superlative in the book and then some.

Then suddenly Teva sank from $34 to $28 in the space of two months. Suddenly people found to their consternation that their investment portfolios were shrinking like violets. And they don't get it - the company's second-quarter financials were excellent, the company is raking in the cash and the future of the generic drug market just looks rosier by the day as the U.S. government struggles to lower health care costs.

You try to explain to them that Teva the titanic is just another stock. Shares have appropriate price ranges, multiples and market caps. The fact that a company's share price has mushroomed in the past doesn't mean it will do so in the future. In fact, if it rose 1,200 percent, the chances are that it won't do it again.

Israeli investment managers have come to realize that it's very risky for them not to hold some Teva stock, because of its enormous weight in the TASE indexes, and because of its performance. Anybody bereft of Teva shares stands to underperform the index. And so everybody today holds large amounts of Teva stock.

But now the portfolio managers and the Teva devotee in the street are learning a painful lesson: it may be the best company in Israel, but it isn't immune to risk. And so neither are they.

A portfolio in which Teva comprises 30 percent or more cannot be called diversified. And at the end of the day, a Teva share is not a bond.

To avoid inaccurate generalizations, we shall not compare Teva with giant American companies. Experience of the last decade has taught the cost of betting against Teva and its management. But do not ignore the bitter lesson learned by millions of American investors who linked much of their wealth to corporate icons that seemed bigger than life and utterly immune to failure. A stock is a stock is a stock. No more.