Stocks & Markets May 27, 2010, 11:18PM EST

Pros See Opportunities in Battered European Stocks

Investment managers tell Businessweek.com where they're finding the best bargains. One focus: companies with large exposure to emerging markets

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The European stock market has become a textbook example of how investors can throw the baby out with the bathwater during times of excessive fear of an economic disaster. True, the euro's value has fallen 10 percent since its recent peak on Apr. 14, and the sovereign debt of Greece was downgraded to junk by Standard & Poor's, raising concerns about possible defaults in other countries. But many portfolio managers continue to see opportunity in Europe. A key reason: a competitive advantage for European exports due to currency weakness.

"I think the world GDP growth trend is intact," says Dean Tenerelli, who manages the $685 million T. Rowe Price European Stock Fund (PRESX). "I think it's a time to be looking [for oversold stocks] and a time to be buying." He suggests searching for companies in economies farther from the center of the sovereign debt crisis and making distinctions between those likely to make the most and least severe fiscal budget cuts. Italy has a smaller fiscal deficit than either Ireland or Spain, for example, so it will probably have less cost-cutting—with a less pronounced impact on economic growth.

A key feature when looking for stocks to buy: ample exposure to growth markets outside of Europe, particularly emerging markets. Consider this: At a time when European households are likely girding up for major cutbacks in government services and other austerity measures that will have to be imposed to pay for the European Central Bank's $1 trillion rescue package for Greece, demand for luxury goods made by LVMH Moët Hennessy (LVMUY) is up more than 10 percent in China, says Wendy Trevisani, manager of the Thornburg International Value Fund (TGVAX). Forty percent to 50 percent of the $20 billion fund is European-based, excluding the United Kingdom.

China is a desirable end-market these days not only because of its burgeoning middle class, hungry for wines, leather goods, watches, and jewelry and cosmetics, but because its currency's tie to the U.S. dollar makes for relatively low currency volatility and more predictable revenues.

Health-Care Picks

Health-care companies also have broad exposure to still-robust foreign markets. Trevisani recommends Novo Nordisk (NVO), a global manufacturer of diabetes treatments and hormone replacement therapy that's based in Denmark. The company generated 66 percent of its sales outside of Europe in the fourth quarter of 2009 and has leading market share in emerging markets and some dollar-based economies. She also likes Fresenius Medical Care (FMS), a manufacturer of dialysis products and services with clinics throughout the world.

Trevisani prefers to buy stocks on local European exchanges where there's greater liquidity, but all of the stocks she buys have American depositary receipts on U.S. exchanges.

The market volatility of the last month has created "an opportunity to add to names we like, selectively, depending on how much stocks have sold off," says Clas Olsson, senior portfolio manager of the $740 million Invesco European Growth Fund (AEDAX). "We're bottom-up pickers, not macro guys," he says. "We don't know what's going to happen to the euro or the European Union, [but] we tend to own companies that have earnings outside of the euro zone."