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 Rio Tinto (NYSE: RTP), Telefonica, and Daimler (NYSE: DAI), has risen 158% since the end of April 2003 -- thoroughly outpacing the U.S.-focused Vanguard 500 Index (VFINX), which has returned 65% from the same time.

Of the more than 100,000 investors participating in Motley Fool CAPS, the Fool's free investor-intelligence community, many have noted the promise in Europe. Here are this month's top five European stocks, all with top five-star ratings from our CAPS participants:

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.

Bo Jackson's new favorite company
As we go about our day, we take our joints for granted. We couldn't care less about the structures in our knees and hips that keep us in free and painless locomotion. That is, until one of those joints goes bad, either through natural causes or external damage. Then we gain a whole new respect for our joints. An injured joint simply has to be repaired, lest we walk around in further pain or cause a worse injury.

When that need arises, U.K.-based medical-device company Smith & Nephew has the tools that will get you back on your feet. S&N specializes in orthopedic reconstruction, endoscopy, and orthopedic trauma therapy. It also has advanced wound management to treat hard-to-heal wounds, such as diabetic foot ulcers and post-operative wounds.

All of these businesses will become even more important as the baby boomers grow older. S&N is established enough in this country's medical field to handle and benefit from that demographic trend, since it already generates nearly 60% of its revenue from the U.S. But it's not exactly the only game in town. In terms of global market share of the orthopedic reconstruction market, S&N currently holds the fourth position behind Zimmer (NYSE: ZMH), Johnson & Johnson (NYSE: JNJ), and Stryker (NYSE: SYK), respectively.

Yet S&N is seeking to differentiate itself from this group by focusing on younger patients, not older ones. In its most recent 20-F filing, the company said it's looking to serve the "young and active" demographic because "in the U.S., patients aged 64 and under represent 41% of the primary hip and knee replacement market, and management believes this sector is growing at twice the overall market rate."

Some may look at this strategy and wonder why S&N isn't focusing on older patients, but there might be a method behind the madness. As CAPS player bobbydel put it simply last June, "[We] runners may need these products as we age." In other words, aging Americans are more health-conscious and remain active longer, so S&N's products, which are geared toward the active lifestyle, stand to benefit.

Other CAPS players also believe S&N has the wind at its back: 65 of 69 investors who have rated the stock think it will outperform the S&P 500 going forward.

S&N's current valuation, however, doesn't indicate a screaming buy. With a price-to-earnings ratio hovering around 40, it's a bit pricier than many in its peer group. The company also reported lackluster first-quarter earnings today, and shares fell by 5% in London trading this morning. If shares decline further, a better buying opportunity may present itself.

If you'd like to learn more about Smith & Nephew or add your two cents to the discussion, you're in luck. Over on Motley Fool CAPS, more than 100,000 investors are waiting to hear what you have to say. Sign up for this free service today!