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 vs. 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 Total SA (NYSE: TOT) and Novartis (NYSE: NVS), has returned 180% since late February 2003 -- thoroughly outpacing the U.S.-focused Vanguard 500 Index (VFINX), which has returned 75% from the same time.

Of the more than 85,000 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, as CAPS participants have rated them:

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.

By the hammer of Thor!
The iShares MSCI Sweden ETF is making its third appearance on our list over the past four months, despite giving up 9% of its value since the end of November. One of the reasons for continued bullishness could be the fund's posted 4% dividend yield, but Sweden's strong macroeconomic trends and solid industrial base could also be positive factors. 

In its most recent inflation report, Sweden's consumer prices fell slightly from 3.5% in December to 3.2% in January. The report showed that, for the moment at least, Sweden seems to have a more stable inflationary environment than here in the U.S., where consumer prices have jumped 4.3% over the past year. A stable, low-inflationary environment tends to boost stock prices because investors require lower real returns and can also feel more confident in their valuations.

In addition to encouraging macroeconomic factors, the iShares MSCI Sweden ETF also has significant exposure (nearly one-third of the portfolio) to the country's renowned industrial companies like Volvo, Scania, and Sandvik. Over the past year, the U.S. heavy construction and commercial vehicle industries have been particularly strong, with Deere & Co. (NYSE: DE) and Caterpillar (NYSE: CAT) reaping the benefits from infrastructure-hungry emerging markets. Conversely, their Swedish counterparts have been adversely affected by the weaker dollar and the stronger Swedish krona, because much of their revenue depends on exports. If the dollar gets stronger and krona-denominated products therefore become more attractive, the Swedish industrial companies could profit tremendously.

Over on CAPS, all 133 investors who have rated the Sweden ETF think it will outperform the S&P 500 going forward. One of the Swedish bulls is AceJack72, who wrote last August:

Sweden is an up-and-coming market, it has made great changes in its politics which will greatly benefit their market, this is a nice basket of Swedish stocks.

Sweden's government is currently controlled by four center-right parties that have a "focus on boosting labour participation and improving conditions for company start-ups," according to the Economist Intelligence Unit. Such a move toward free-market enterprise is certainly encouraging for a country that was ruled by Social Democrats for 65 of the past 75 years. 

What do you think? Will Sweden 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.