Buy This Sector to Beat the European Sovereign Debt Crisis

The sovereign debt crisis in Europe is beginning to take a tone very reminiscent of the credit crisis that plagued the U.S. in 2008. The domino effect of a potential Greece debt default coupled with worries that the same thing could happen in Portugal, Spain, and Italy is creating a dicey situation for investors who often look to foreign markets for investing diversification. So what's a long-term investor to do? How about the exact opposite of what you'd have expected?

Returns you can bank on
Buying bank stocks in Europe could be your ticket to ridiculous returns over the next few years as the credit crisis stabilizes and investors' emotions come into check. Understand that European banks don't have a magic pill that's going to transform them into profit-producing machines overnight, but the worries surrounding many of its largest banks may be overdone. Specifically, focusing on banks that are based in the United Kingdom could be your ticket to success.

Many of the largest European banks have very little exposure to the troubled EU countries -- Greece, Italy, Portugal, Spain, and Ireland. Barclays (NYSE: BCS  ) , Lloyds (NYSE: LYG  ) , Royal Bank of Scotland (NYSE: RBS  ) , and HSBC (NYSE: HBC  ) all have relatively minimal exposure to sovereign debt from the PIIGS. Currently making up 1.26%, 0.01%, 0.15%, and 0.27% of total assets, it makes little sense to lump these banks in with the rest of the sector that is in trouble.

Secondly, these banks all share the common trait that they have globally diverse operations. In short, these banks aren't just sovereign lending entities. They have personal and commercial lending segments, as well as personal investment divisions -- and investors seem to have forgotten that.

They've also forgotten just how profitable these European banks are. With the exception of RBS, these companies are trading at single-digit forward P/E ratios with impressive five-year growth expectations. Barclays and HSBC analysts anticipate growth of 23% annually over the next five years while Lloyds, which was hit much harder in the recession of 2009 than many other banks, is expected to grow at a blistering 69% per year.

Based on their assets, these banking giants are also inexpensive. Barclays, RBS, and Lloyds all trade significantly below their book value, with HSBC trading at a mere 1.1 times its book value. To boot, Barclays and HSBC are paying a highly sustainable dividend currently yielding 1.8% and 3.7%, respectively.

You're up, Europe!
With lower exposure to sovereign debt than even some of the United States' largest banks, it makes sense to consider investing in U.K.-based European banks. I'm even willing to speculate that a portfolio evenly divided among these four banks could easily outperform a portfolio divided evenly among the four largest U.S. banks over the next three years. While I can't make your investing decisions for you, I highly recommend you at least get these four banks on your watchlist and consider giving Europe another look.

Add Barclays, Lloyds, Royal Bank of Scotland, and HSBC to your watchlist.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's free of charge but full of interest.

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