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We don’t normally associate Europe with safety.

The fiscal cliff has been in the spotlight of late, but the euro zone is in the same mess it was the last time we were paying close attention.

Italy and Spain remain buried under a pile of sovereign debt. Greece was bailed out for a third time in late November. And now even mighty France is part of the problem after Moody’s stripped the world’s fifth-largest economy of its impeccable triple-A credit rating.

Despite all that, investment opportunities abound in the debt-ridden region.

As Barron’s expertly detailed in a late-December feature story, European stocks are behaving very differently from the continent’s woebegone economy. The Stoxx Europe 600 index rose more than 16% in 2012, outpacing the S&P 500’s 14% gains. Furthermore, the average yield of a stock listed on the Stoxx 600 is 3.8% – well ahead of the 2.2% yield S&P stocks average.

Even after last year’s strong move pushed the Stoxx 600 to its highest level in nearly two years, European stocks by and large can still be had at a discount. The benchmark European index’s components are trading at just 11.5 times predicted 2013 earnings – cheaper than the 12.5 forward P/E ratio for the S&P 500.

That’s why some investors think European stocks could advance another 20% this year.

Not all European stocks are created equal, however. There are a lot more potential minefields across the pond than there are with your average publicly traded U.S. company. To reduce your risk, you have to avoid the mines and dig a little deeper to find Europe’s hidden investment gems.

Here are four places to look when searching for the right European stock:

  1. Germany. Europe’s strongest economy has largely avoided the same debt pitfalls many of its neighboring countries have fallen into. So it’s no surprise that Germany’s benchmark DAX index was the best performing stock market in Europe last year, gaining 29.5%. This year should be more of the same, as Germany’s economy is expected to grow another 1% – ahead of its estimated 0.8% growth rate in 2012. What’s more, German stocks (NYSEARCA:EWG) are even cheaper than the average European stock, trading at just 10.9 times expected 2013 earnings.
  1. Major exporters. The global economy is expected to grow by as much as 3.5% this year, and with that accelerated growth comes increased consumer demand. Multinational companies that can capitalize on that growing demand stand to profit most. There are a number of publicly traded European companies that fit that bill – companies that do much of their business outside of the debt-ridden euro zone.
  1. Auto makers. Speaking of exporters, 2013 should be another good year for European car manufacturers with global appeal. BMW and Volkswagen (OTCPK:VLKAF) – both German-based companies, mind you – remain cheap relative to earnings and stand to benefit greatly from the dual economic recoveries in the U.S. and China. The two most prosperous economies in the world have an insatiable appetite for imported cars, helping the two most recognizable auto-making brands in Europe grow despite a floundering European car market.
  1. Luxury brands. Just like the cars they crave, the U.S. and China hold other European luxury brands in high esteem. Global sales of luxury goods grew an estimated 5% in 2012, buoyed by improved economic conditions in many countries outside of Europe. That means high-end European companies such as LVMH Moet Hennessy (OTCPK:LVMHF) (makers of Louis Vitton, Christian Dior and Donna Karan), Gucci (OTC:GUCG) and Richemont (whose luxury brands include Montblanc and Piaget) – household names in certain well-to-do circles here in the U.S. – should again flourish in 2013.

Stocks of European companies that boast one or more of these characteristics are best positioned to post strong returns this year. Sure, there are risks – but you can minimize those risks by searching for stocks with the aforementioned qualities.

Besides, with most European stocks still cheap, your risk is already minimized. And if last year was any indication, the rewards have the potential to be greater than your average large-cap U.S. stock.

P.S. I recently added exposure to Europe in the latest issue of my $100k Portfolio service. Click here for more information on the two funds I picked to leverage what I expect to be a big move in 2013.

Source: 4 Ways To Buy Europe On The Cheap