Because of the big losses they suffered during the recession, many investors remain wary of stocks — especially European ones. 

#-ad_banner-#After all, Europe’s most recent debt crisis is probably fresher in people’s minds since it peaked more recently — in 2012, compared with 2008 and 2009 for the U.S. What’s more, European stocks have badly lagged the U.S. market for years.

So why even consider them? Because they’re set to deliver attractive returns going forward.

One major sign of this was the eurozone’s official emergence from recession last summer, when GDP estimates indicated Europe’s economy collectively expanded 0.2% in the second quarter of 2013. It has managed to maintain a similar pace of growth since then.

There have been other signs of progress, too, like rising retail sales, rebounding factory orders, and falling bond yields in the weakest areas such as Italy and Spain. Importantly, the labor market appears to be stabilizing (though overall unemployment is still quite high near 12%).

There’s also more optimism in one particularly well-informed group — business executives — as measured by the European Commission’s Economic Sentiment Indicator. As of Jan. 31, it stood at 100.9 — up more than 10% since last summer. 

Now don’t get me wrong — I’m not saying Europe is on solid footing yet. But I think it has started up the long slope to recovery and should progressively improve. And that should mean more chances to profit from stocks in the region. I say this with confidence because one elite investor has already had great success in Europe for quite a few years now.

I’m referring to David G. Herro, lead manager of Oakmark International (OAKIX). I’m amazed by this Europe-focused mutual fund for a couple reasons, like the fact that Herro has kept it in the top 2% of the foreign large-blend category for a decade. During the past five years, OAKIX has returned an average of 21.8% annually, soundly beating the S&P 500’s 18.2% rate of return — during a period when the typical Europe fund lagged the U.S. market by 5% to 6% a year.

Herro’s long-term success stems from a strict value approach in which he and his team select stocks trading for at least a 40% discount to their estimated intrinsic value. These stocks must also be financially sound, have shareholder-friendly management and display attractive growth prospects. Fund positions are reduced as they approach Herro’s intrinsic value estimates.

There’s just one little snag, though — OAKIX is closed to new investors.

Great funds often have to close to keep from being overwhelmed with cash from performance chasers. But the good news is there’s nothing stopping investors from following OAKIX and using its holdings list as a starting point for researching their own European stock picks.

Herro has had particular success with European financial stocks, a group investors severely punished during the 2008 and 2012 crises. But Herro dove right in, convinced banks and other financial companies, though badly hurt, wouldn’t collapse. He was right. Europe’s financial sector is up around 50% since the height of the crisis.

In fact, it’s still the most heavily weighted sector in OAKIX, accounting for 27% of the fund. Compared with the typical foreign large-blend fund, Herro is also heavily emphasizing consumer cyclical stocks, which make up 23% of OAKIX, and industrials, which account for 17%.

Here are some of Herro’s top picks:

1. Credit Suisse (NYSE: CS )​
​	Flickr/nggalai		Credit Suisse hasn’t rebounded as well as the overall European financial sector — in fact, the stock is down nearly 2% a year since 2009. It’s likely to bounce back soon, though. According to Herro, the company is now well-capitalized and has strong investment banking operations that should contribute to overall earnings per share (EPS) growth of at least 5% to 10% annually for years.
	Sector: Financial services Fund Weighting: 5.1% Recent Share Price: $30.25 52-Week Range: $24.83-$33.98 P/E Ratio: 14​

2. Daimler (OTC: DDAIF)​
The stock of this German automaker, known for its luxury Mercedes-Benz brand, has nearly tripled during the past five years. Herro says two key catalysts for future growth are increasing traction in China, where sales have jumped 15% in the past year, and more efficient production leading to higher margins.	​	Flickr/NRMA New Cars
		Sector: Consumer cyclical Fund Weighting: 3.1% Recent Share Price: $86.30 52-Week Range: $49.72-$93.20 P/E Ratio: 9​

3. Toyota (NYSE: TM )​​​​​​​
​	Flickr/Stradablog		As I pointed out when I profiled this stock late last year, TM has been out of favor for a while. A series of recalls spanning four or five years finally prompted investors to beat the share price down to current levels from a high of around $135 last August. However, a major rebound could be in the offing, assuming management successfully curbs the recall issue, and the stock may more than double during the next five years.​​
	Sector: Consumer cyclical Fund Weighting: 2.5% Recent Share Price: $117.40 52-Week Range: $99.34-$134.94 P/E Ratio: 10​

4. Lloyds Banking Group (NYSE: LYG )​
Comments: This venerable U.K.-based banking, insurance and financial services firm almost bit the dust in 2008 after acquiring HBOS, a mortgage company loaded with bad debt. LYG has come a long way since, though, and it could be a multi-bagger within five years as it once again becomes profitable following several straight years of losses. Among the steps it has taken to get back on track include getting big-time government assistance, writing down bad assets, and closing HBOS’ worst businesses. Some analysts are beginning to say Lloyds is re-emerging as the strong, conservative, profitable bank it once was.​	​	Wikipedia/Mtaylor848
		Sector: Financial services Fund Weighting: 2.4% Recent Share Price: $5.45 52-Week Range: $2.82-$5.76 P/E Ratio: N/A​

5. AMP (OTC: AMLYY)​
​	Wikipedia/Hpeterswald		Comments: In Australia, saving for retirement is mandatory, and employers must contribute 9% of each employee’s pay into a 401(k)-like account annually. Nine out of 10 Australians have such an account. As Australia’s largest wealth management firm, AMP is well-positioned to profit by providing investment and retirement planning advice. The stock hasn’t yet delivered attractive total returns, but it does offer more than a 7% yield for investors to enjoy while they wait for the stock to pan out.
	Sector: Financial services Fund Weighting: 2.1% Recent Share Price: $14.85 52-Week Range: $14.65-$23.58 P/E Ratio: 17​

Risks to Consider: Europe’s economy remains fragile and could stagnate or slip back into recession, which in turn could decimate stock prices.

Action to Take –> Europe finally appears to be on the mend, so it makes sense for investors to begin allocating money to the region again, since the best gains may come in the earliest stages of the recovery. To help their chances of reaping big profits, investors should closely watch the moves of leading international investors like David Herro with long histories of outperformance.

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