The market rally finally seemed to flag on Monday and the Dow fell below 21,000 for the first time since breaching this barrier on Mar 1. Geopolitical tensions and fresh allegations made by President Trump against his predecessor combined to drag stocks lower. Also adding to investors’ worries was an imminent rate hike, following indications to that effect by Fed Chair Janet Yellen.

In Europe, the fate of stocks was somewhat similar, partly due to the upcoming rate hike. However, most of the losses for the day were caused by disappointing news from Deutsche Bank AG (DB - Free Report) . This was a notable departure from recent trends in the European markets, where stocks have been notching up steady gains

At present, there is a compelling case for looking beyond the success of U.S. stocks and diversifying into other markets, particularly Europe. Lower valuations, earnings and sales growth and considerable price gains mean that adding stocks from the region to your portfolio makes for a great investment option.

Recent Performance Strong, Earnings & Sales Grow

While the U.S. rally following the declaration of election results has caught the imagination of a large chunk of investors, European stocks have been making steady gains in 2017. Since Dec 1, the iShares MSCI Germany ETF, which is good indicator of the health of Europe’s most prominent equity market, has gained 12.8%. Over the same period, the S&P 500 gained 8.6%, which reflects the extent to which German stocks have outperformed their U.S. peers.

Going on to examine the relatively less popular Italian and Spanish markets, one finds that each of them have also outperformed their counterparts in the U.S. The  Shares MSCI Italy ETF and the iShares MSCI Spain have gained 10.7% and 11.5%, respectively since Dec 1. A look at the entire region as a whole also reveals a similarly optimistic picture. Over the same period, the Vanguard FTSE Europe ETF has gained 9.4%, slightly higher than the S&P 500.

Valuations Remain Reasonable

It could be argued that recent performance may not be a good predictor of future returns. However, earnings growth and prevailing valuations are likely to propel price gains going forward. Analysts from J.P Morgan (JPM - Free Report) have recently stated that earnings growth for the Stoxx Europe 600 index’s components as a whole is around 10% on the average. This is clearly higher than the total earnings for 484 members of the S&P 500 available as of Mar 1, which are up 7.4% during the fourth quarter.  

Coming to valuations, by 2015, the S&P 500 had hit its highest forward price to earnings ratio since 2004. Currently near 25, the metric has traversed even higher. Following Brexit, the valuation gap between the S&P 500 and the Stoxx Europe 600 had hit its highest point since 2011 by Jun 2016. By the end of last year, while Japan and the U.S. had price to earnings ratios hovering around the 25 mark, several European stocks were sporting half that number.

Our Choices

The only risk which continues to hover on the horizon for Europe’s stocks is the impact of a change in governments across key economies of the region. But though the region’s equities had suffered in the aftermath of Brexit, they have affected a relatively quick recovery.

This is why picking European stocks looks like a smart option at this point. However, picking winning stocks may prove to be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

Grifols, S.A. (GRFS - Free Report) is a Barcelona, Spain based chemicals and pharmaceuticals company.

Grifols has a VGM Score of B. The company has expected earnings growth of 11.4% for the current year. Its earnings estimate for the current year has improved by 9.1% over the last 30 days. The stock has a Zacks Rank #1(Strong Buy).

ArcelorMittal (MT - Free Report) is a Luxembourg-based steel and mining company.

ArcelorMittal has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 56.8% for the current year. Its earnings estimate for the current year has improved by 16.7% over the last 30 days.

RELX NV (RENX - Free Report) is based in Amsterdam, the Netherlands and provides professional information solutions primarily in North America and Europe.

RELX has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 6.3% for the current year.

Telefonica S.A. (TEF - Free Report) is a Madrid, Spain provider of fixed-line telephone services, wireless communications, Internet access, video and data transmission services.

Telefonica has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 39.2% for the current year. Its earnings estimate for the current year has improved by 10.6% over the last 30 days.

Hannover Rück SE (HVRRY - Free Report) is a Hanover, Germany based provider of reinsurance services and products.