With rockets recently flying over Israel, leaving death and destruction in their wake, and the Israeli-Lebanese truce on extremely shaky ground, why, you might wonder, would anyone want to invest in the Jewish state?

“Because there are some world class companies there and Israel is a survivor,” Allan Nichols, Morningstar’s international analyst, tells me.

Indeed, the Israeli stock market has demonstrated its resiliency. After tumbling 9.4% in the first few days following the beginning of the hostilities involving Israel, Lebanon and Hezbollah, it has recouped more than two-thirds of its loss, rebounding 6.9%.

Clifford Felig, a leading Israeli mergers and acquisitions lawyer, tells me the Israeli-Lebanese conflict, contrary to what some might think, has not sidetracked M&A activity in the country. “What was going on in the M&A arena in Israel before and during the battle is still going on,” he says. In this context, he points to the $1.5 billion acquisition at the height of the conflict of the Israeli company, M Systems, a maker of memory devices, by West Coast-based Sandisk.

Mr. Felig, who was the lead Israeli lawyer in last May’s $4 billion acquisition of 80% of Iscar Metalworking, an Israeli maker of metal cutting equipment, by Warren Buffett’s parent company, Berkshire Hathaway, says global interest in deals with Israeli companies remains solid despite the Middle East turmoil. He notes, for example, that he is currently engaged in negotiations involving the acquisitions of two Israeli companies, one in financial services and the other in low technology, by European and Asian buyers. He declined to identify any of the parties.

From an investment standpoint, Mr. Nichols says he wouldn’t overlook Israel because of what’s going on there. That, in effect, was also the gist of a recent commentary he sent to Morningstar’s clients. In it, he pitched investing in Israel, citing the following plusses:

• Very few of the globally successful Israeli companies have significant business in Israel and thus are relatively immune to the daily struggles in the country.

• The Israeli government has provided significant tax breaks and other incentives for setting up business in the country. Corporations rarely pay tax rates above 25% and many pay much less. In the process, Israel has attracted Jews from around the world, many of whom are well educated and can compete with the best in the world.

• Average GDP per capita is $23,770, which puts Israel on the level of southern Europe and is far higher than a typical emerging market.

Although he is favorably disposed to Israel, Mr. Nichols emphasizes that investing there is not for the faint-hearted because of Middle East uncertainties.”It’s riskier than the average country and I don’t know if the peace truce can hold,” he says.

In its recent fighting with Hezbollah, bombs have not struck Tel Aviv or traveled further south (to an area that houses most of Israel’s manufacturing), but the terrorist organization has claimed it has rockets that can reach these areas. Mr. Nichols points out that a bombing campaign poses the everpresent risk of wiping out a company’s entire management team.

As far as Israeli stocks go, Mr. Nichols has two favorites. The first, which he owns personally, is Teva Pharmaceutical Industries ($34.34), one of the world’s largest makers of generic drugs with 2005 sales of $2.5 billion. At the moment, the stock is not on Morningstar’s buy list, but the analyst likes it for the long run and thinks it can appreciate 9% annually between now and 2010.

Why doesn’t Morningstar consider it a buy? Because of a decision by Merck to make a generic version of its multibillion-dollar a year cholesterol-fighting drug, Zocor, which is going off patent. Mr. Nichols thinks other big pharmaceutical makers may follow Merck’s lead by also making generic versions of major drugs when they lose their patents and this, in turn, could slow Teva’s growth rate.

Still, the analyst sees positive trends that should ensure annual low teens sales growth through 2007 and 7% after that. People are living longer, getting older and using more drugs; more drugs are going off patent, and the government is increasingly pushing generics as a means of cutting health care costs.

His other Israeli favorite is Given Imaging ($19.74), a maker of medical devices on the cutting edge of technology. It developed the first small bowel capsule endoscope system, which consists of a camera within a pill that can be swallowed and takes pictures as it travels through the gastrointestinal tract, wirelessly transmitting the images to a data recorder and, later, to a doctor. Given recently received regulatory approval for imaging the esophagus and is developing a product for the colon.

The company has also been preparing for trouble in Israel by building backup manufacturing facilities in Ireland. Given, which posted 2005 sales of $86.8 million, is projected by Mr. Nichols to grow revenues 23% a year over the next four years. In the same period, the analyst sees about 15% annual stock appreciation. He says Given has the potential to reach $25 in 12 months.

His bottom line: “Israel is a unique emerging market and investors should capitalize on the opportunities.”