Europe's Hot Stocks Right Now

Stodgy. That's how I used to think of European stocks, what with Europe's aging population, constant labor issues, and historically anemic growth in gross domestic product. I used to prefer the higher-growth regions of Asia and South America.

But I've changed my opinion on European stocks in recent years. You may want to take a second look, too.

A breath of fresh air
A lot has changed in Europe over the past six years. The euro currency that hit the market in 2002 recently hit its strongest value versus the U.S. dollar. Former Soviet bloc countries such as Lithuania, Estonia, and Latvia joined the European Union in 2004, and pro-market leaders have been elected in Germany and France.

European stocks reflect that growth and change. The Vanguard European Stock Index Fund (VEURX), for instance, with top holdings in Nokia (NYSE: NOK  ) , Royal Bank of Scotland (NYSE: RBS  ) , and UBS (NYSE: UBS  ) , is up 180% since March 2003 -- thoroughly outpacing the U.S.-focused Vanguard 500 Index (VFINX), which has returned 68% from the same time.

Of the more than 94,000 investors participating in Motley Fool CAPS, the Fool's free investor-intelligence community, many have also noted the promise in Europe. Here are this month's top five European stocks, all with top five-star ratings from our CAPS participants:

Stock

Country

Industry

iShares MSCI Sweden Index (EWD)

Sweden

ETF

CGG Veritas (CGV)

France

Oil and Gas

National Grid (NGG)

U.K.

Utilities

iShares MSCI Switzerland Index (NYSE:EWL)

Switzerland

ETF

Aktieselskabet Dampskibsselskabet
Torm
(TRMD)

Denmark

Shipping

Source: Motley Fool CAPS as of March 28.

Please bear in mind that these stocks are not formal recommendations. Instead, I offer them as jumping-off points for further research. And I'll also point out that researching five-star CAPS stocks such as these is an effective tool for investors.

What the Swiss miss
Unlike most regional exchange-traded funds out there, the top holdings of the iShares MSCI Switzerland ETF are probably familiar to American investors. In fact, common names such asNestle,Roche, and Novartis (NYSE: NVS  ) make up nearly half of the ETF's assets.

But although those recognizable names may bring comfort to some investors, it could also cause a problem for U.S. investors, since a significant portion of those companies' sales are domestic. Roche, for instance, gets 38% of its revenues from our shores. If you're looking for an ETF to diversify away from the U.S. economy, this one isn't it.

On the other hand, our CAPS investors are smitten with Nestle, Roche, and Novartis, each of which has either a four- or five-star rating. Back in October, CAPS player jpmgator06 was one of our Swiss bulls: "Love the large cap Swiss stocks. Nestle, UBS and Novartis are currently very attractive. Should see continued growth as Germany recovers and Eastern Europe continues its growth."

Another bullish reason for the ETF is its geographic diversity. Even though some of its top holdings derive significant revenues from North America, its smaller components help to pick up the slack. In fact, this diversity has helped the fund get through the global market downturn of the past six months -- it has lost only about 3% of its value, versus 13% for SPDRs (AMEX: SPY  ) and approximately 10% for iShares EAFE Index (NYSE: EFA  ) .

NetscribeETF is bearish on this fund but still admitted last March that its diverse geographical footprint had helped carry it through good times and bad: "[H]as a sizable investment in Pharma sector, which is largely influenced by the international sector while the investment in the insurance and other financial services sector was swayed by the domestic events."

NetscribeETF is currently the only bear for the ETF on CAPS -- 57 of 58 investors who have rated the Swiss ETF think it will outperform the S&P 500 going forward.

Investors should understand, however, that Switzerland is not a member of the European Union, and its recent election results, for better or for worse, show no indication that it will join anytime soon. The far-right party, SVP, which won 29% of the parliament seats, has a platform of no E.U. entry and is thoroughly xenophobic. The chances that skilled immigrants will come into Switzerland to boost growth are therefore quite unlikely in the near future.

What do you think? Will Switzerland continue to trot along in an uncertain global market? Make your voice heard about this ETF -- or any stock or ETF, for that matter -- on Motley Fool CAPS.


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