Image: Europe © Photodisc, SuperStock

When images of violent protests in Spain and Greece hit TV screens again last week, they reminded us that Europe was still a long way from resolving its problems -- despite the relative calm of recent months.

Sure, there's still a sense of relief in the air -- as reflected in Monday's rally -- thanks to European Central Bank chief Mario Draghi's pledge to do "whatever it takes" to save the euro. Chiefly, this will mean centralized European purchases of debt issued by the shakier countries to keep their bonds from blowing up.

But here's the problem -- which has had investors fleeing Europe and has created a good buying opportunity in the now low-priced stocks of European companies: Any centralized bond purchases will come with conditions. The governments of troubled countries like Italy, Spain and Greece have to impose austerity in government spending and make labor-market reforms to improve their creditworthiness and competitiveness.

These reforms will continue to spark protests -- and that will continue to worry investors. After all, protesters may prevail and push back on reform so successfully that the eurozone falls apart. That would be terrible news for the economy and for most European stocks.

But this meltdown scenario won't play out, because it's ultimately in the interest of European countries to maintain the union -- and they know it.

Image: Michael Brush

Michael Brush

"Europeans want to be together," says Chad Deakins, the portfolio manager of the RidgeWorth InternationalEquity Fund (STITX). "They recognize they need each other to compete as a global trading bloc against the U.S. and China." Together, Europe's gross domestic product is 85% of U.S. GDP. "Divided, they don't have much critical mass."

If he's right -- and I think he is -- that makes European stocks a classic contrarian play right now: Buy on the protests, collect on the peace. Here's why, and what you might invest in now.

Priced for nervousness

Many European stocks look downright cheap right now. Collectively, they trade for around 12 times earnings, compared with 14.6 times earnings for U.S. stocks, says Deakins.

And no, it's not 100% clear that Europe will get out of its mess. But with contrarian investing, it's never 100% clear you're right until after the fact -- and then it's too late to act, says Ramond Vars of the NorthRoad International Y Fund (NRIEX), which gets Morningstar's top, five-star rating and which is heavily overweight Europe right now.

"We are concerned, but that fear is what gives us the value opportunity," says Vars. "We are finding great global businesses that are undervalued compared to their peers around the world. We think Europeans will muddle through and do what they have to do."

One great way to invest in this theme, says Deakins: Go with European companies whose stocks are suppressed because of their European addresses, even though they do much of their business elsewhere in the world.

Portfolio managers at NorthRoad International agree with this approach, and you can see it in their fund's profile. Three-fourths of the fund is in Europe-based companies, but just 31% of the sales made by the companies it owns are collected in that region.

Now let's take a look at several stocks favored by fund managers bullish on Europe. Most of these are American depositary receipts, or bank-issued certificates that represent the shares of companies on foreign exchanges. They trade like U.S. stocks.

1. Nestlé

Based in Switzerland, Nestlé (NSRGY) seems like a quintessentially European company. So, naturally, investors are worried that austerity measures and the uncertain economic outlook there will weigh on Nestlé's results, and its stock, as consumers trim spending.

But Nestlé has a huge global distribution platform -- so big that it is the largest packaged food and beverage company in the world, by sales. It's a key supplier to many grocery chains, even here in the U.S. You're no doubt familiar with its Nescafé coffee. But Nestlé is also the company behind Poland Spring and Perrier bottled water, prepared foods sold under the Hot Pockets, Lean Cuisine and Stouffer's brands, Coffee-Mate nondairy creamer, Kit Kat candies, and even pet foods like Friskies and Purina.

Nestlé boasts such powerful brands, pricing power and marketing savvy that it has been able to generate nice sales growth even through the difficult times of the past few years, says Vars, of the.

More important for investors, Nestlé has a big presence in faster-growing emerging markets, which account for about 40% of sales. Nestlé recently predicted that by 2020 it can triple sales in Asia and Africa, where it is already the largest food company. Nestlé so much solid financial strength it can borrow at rates below those paid by many governments and use those funds -- plus its sizable cash flow -- to reinvest in great businesses around the world "regardless of what happens in Europe," says Vars.

So its forecast of 5% to 6% annual sales growth seems believable. "We believe it could surprise on the upside over the medium term," says Morgan Stanley analyst Eileen Khoo, who has an overweight rating on the stock.

2. Volvo

Volvo (VOLVY) has been transformed in recent years. In fact, Volvo isn't primarily a carmaker anymore. It also manufactures trucks, buses and construction equipment. It's facing a slowdown in several markets around the world. But the fact that it is based in Europe and seen as a European company explains why the stock is inexpensive, says Deakins. Its ADR has moved up to $14 from $11 in June, but it is still down from around $20, where it traded in early 2011.

With Volvo, you get paid a dividend yield of around 3% as you wait for the stock to move up. What might make that happen? Progress by Europeans toward resolving their credit crisis would help the economy there and boost Volvo sales. There's a kicker here, as well. An aging truck fleet in Europe is due for replacement, and this should support sales, too, says JPMorgan Cazenove analyst Alexander Whight, who has an overweight rating on the stock. Aging fleets in North America and Japan are also due for upgrades, he says.

Volvo is also going through an overhaul that will cut costs and boost margins, says Whight. For example, it is rolling out common electrical and suspension systems that should save money because they can be used across brands. And Volvo is introducing new value lines of trucks that should also help sales, says Morgan Stanley's Laura Lembke, who has an overweight rating on the stock.

3. Koninklijke Ahold

To successfully invest in Europe right now, you have to follow three basic guidelines, says Marco Priani, portfolio manager of the Advisory Research International Small Cap Value (ADVIX) fund:

  • Go with companies that have no exposure to the debt of peripheral countries such as Spain and Greece.
  • Go with companies that have solid balance sheets and thus don't have to roll over a lot of debt.
  • Favor companies that get a lot of revenue from outside the eurozone.

Koninklijke Ahold (AHONY), which runs supermarket chains, fits all three, says Priani. It doesn't own shaky government debt. It generates lots of cash, so it has good financial strength -- enough to support a 4% dividend yield, in fact. And while it is based in the Netherlands, where it's one of two main supermarket operators, it gets about half its profits from the U.S. Here, it operates Giant and Martin's Food Markets chains, among others.

Ahold, now trading at less than 10 times earnings, is historically cheap, says Priani. And fears about the company may be overblown.

Besides harboring concerns about Dutch consumers, investors are worried about Ahold because U.S. competitor Supervalu (SVU) suspended its dividend in July and guided down on earnings as sales weakened.

But Barclays analyst James Anstead, who has an overweight rating on Ahold, thinks Dutch consumers will hang in there. And he says Supervalu's problems are company-specific, brought on in part by excessive debt. In fact, Anstead says Ahold might actually benefit from Supervalu's problems by picking up stores from its troubled competitor. Anstead expects Ahold to post substantial dividend growth over the next few years, and possibly announce a stock-buyback plan in 2013 -- both of which would support this stock.

4. Sanofi

Shares of European drug-maker Sanofi (SNY) are at multi-year highs, at $44, so it might seem odd to argue that the stock is being held back by fears about Europe. But shares of the Paris company would probably be even higher if investors weren't fleeing Europe-focused mutual funds in droves, putting downward pressure on the stock.

Sanofi does face problems because it is based in Europe, where governments are pressuring down drug prices as part of their austerity measures. But Sanofi gets only about 24% of its sales from Western Europe, and a lot of that is from over-the-counter products and animal-care products -- areas not under government pressure, points out JPMorgan Cazenove analyst Richard Vosser. He has an overweight rating on the stock in part because Sanofi gets more than 30% of its sales from emerging markets, and the potential there is still big. Sanofi CEO Chris Viehbacher recently pointed out that the company has reached only 20% of the population in China thus far.

Another big fear with pharma companies like Sanofi is the "patent cliff" -- or the threat from generic drugs as patent protection rolls off for blockbuster drugs. But these fears may be overblown for Sanofi, says RidgeWorth's Deakins. By the end of 2013, most of the big patent losses at Sanofi will be in the past.

And it will soon be rolling out new potential blockbusters to replace them. "Sanofi is approaching several potential launches that should help reinvigorate growth in late 2013," says Morningstar analyst Damien Conover. These include drugs like Zaltrap for cancer, Aubagio and Lemtrada for multiple sclerosis, Lyxumia for diabetes, and Kynamro for high cholesterol. Despite recent outperformance, "we still see an attractive risk/reward profile," says Morgan Stanley analyst Peter Verdult, who has an overweight rating on the stock.

5. Schneider Electric

American depositary receipts of Schneider Electric (SBGSY), which sells power-management products such as circuit breakers and panel boards, have been weak since mid-September, falling to about $12 from above $13.75. Renewed doubts about Europe probably explain some of this move. The company is based in France, and it does much of its business in Europe.

But fears about Europe's impact on this business are overblown, maintains Vars, because most of the company's business is from outside Europe. It does about 40% of its business in emerging markets.

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In addition, the nature of its business gives it pricing power, says Vars. Schneider Electric's products typically account for just a small part of an overall construction project budget, but they are essential in part because they often help save energy. "That gives them pricing power," says Vars. "People aren't going to mess around and try to go with an alternative." He thinks the stock looks cheap, and he expects 20% to 30% upside from here.

At the time of publication, Michael Brush did not own or control own shares of any company or fund mentioned in this column.

Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.