Bargains are getting increasingly difficult to find in the U.S. stock market. Gone are the fire sales that existed after the financial crisis. The S&P 500 has rallied more than 80% from the March 2009 lows and a rising prognosis for economic growth in 2011 has lifted the stock market near two-year highs. 

That said, there is still a place where bargains are easy, ripe and luscious. Europe. While the U.S. market may be riding high, certain European markets have been taking it on the chin. News of Ireland’s debt woes sent European stocks reeling in November. Particularly hard-hit was Spain. Fear spread that Spain would be one of the next euro zone countries to need a bailout. The iShares Spain ETF (NYSE: EWP) plummeted nearly 20% in just 10 days in November. The exchange-traded fund (ETF) has recovered somewhat since, but it’s still down more than 25% for this year.

The Spanish economy is hurting for sure. The country suffered a real estate crisis of its own and its unemployment rate is hovering above 20%. But, as with any broad market selloff, a handful of good stocks get lumped in with everything else and are taken down unjustifiably.

Such has been the case with the world’s third largest telecommunications company, Spanish-based Telefonica SA (NYSE: TEF). The stock has been unfairly beaten up during the turmoil and is poised to stage a massive rebound. How do I know? I know because this very same situation happened less than eight months ago.

Investors have shunned practically anything to do with Spain, so the stock has recently pulled back more than 20%. But Telefonica actually does most of its business outside the country. About 67% of revenue in the first three quarters was generated in other countries. In fact, the company is the largest telecom operator in the fast-growing Latin American region. It is also a major player in Europe, where it is the largest wireless operator in the U.K. and the Czech Republic as well as one of the largest in Germany.

Buying Telefonica when the Spanish market sells off has proven to be a successful strategy — as recently as this year. When I first profiled the stock during the debt crisis in Greece back in April , it had plummeted to about $53. As fears waned, Telefonica rallied above $83 for a gain of more than 60%.

Telefonica is a special telecom company. While most major telecom operators offer steady cash flow but precious little in the way of growth, Telefonica breaks the mold.

Telefonica’s strong geographical diversification enables it to generate the ideal combination of both steady cash flow and growth. The company gets steady cash flow from established markets in Europe and its earnings growth from Latin America, where wireless and broadband (Internet and TV) saturation rates are just a small fraction compared to those of the developed markets.

Recent results have been quite good. Even though revenue generated in Spain was 4.2% lower for the first nine months of 2010 compared with the year ago period, Latin American revenue soared 10.8% and now accounts for 42% of overall revenue. Overall revenue in the first three quarters rose 6% to 44 billion euro ($57.8 billion). The company also reiterated its earnings target of 2.10 euro per share for 2010, a 23% rise from 2009.

Earnings should continue to grow.

Telefonica continues to invest heavily in expansion, spending 7.24 billion euro in the first nine months of the year. In addition, Telefonica purchased Telecom Portugal’s stake in Brazilian cellular company Vivo Participacoes SA (NYSE: VIV) this past July, which it plans to merge with its existing fixed-line subsidiary Telesp (NYSE: TSP). Vivo is the largest wireless operator in Brazil, and the purchase gives Telefonica majority ownership in the company. The combined Telesp-Vivo will be the largest integrated phone company in one of the fastest growing markets in the world.

As I said earlier, when Telefonica sold off in a big way back in April, it created a huge opportunity. Shares were dirt cheap and investors soon realized that the company’s exposure to Europe was minimal and drove the stock’s price back up. So how cheap is the stock now?

Telefonica sells for less than nine times trailing earnings, compared with its five year average of 12.6. The stock also yields a whopping 7.5%, one of the highest in the telecom group. The company has also announced its intention to increase the dividend more than 20% from 2010’s levels by 2012.

Action to Take –> Telefonica is a huge player in a defensive industry. Overblown concerns about Spain’s effect on Telefonica’s earnings have created a golden opportunity to enter one of the most well-diversified and best-run telecom companies in the world. The company offers international diversification, a strong and growing dividend and solid growth potential going forward. The stock can be purchased at current levels.