Three strong German stocks to buy now

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Robert Smith, investment manager, Baring German Growth Trust, Baring Asset Management.

Booming economic conditions have seen the German market outperform the rest of Europe in recent months. Over the four months to the end of April 2011, the Dax 30 returned 12.8% for investors, compared to 6.8% generated by the wider MSCI Europe Index.

Yet we believe there is more to come. While the industrial sector has seen two years of strong margin growth, the German economy is far more than an export story. Recent data releases show that all constituent parts of German gross domestic product are in positive territory. Even retail sales, hard hit by severe winter weather, have bounced back over 2011, driven by strong domestic consumption numbers. This shows little sign of stalling, with the Munich-based Ifo Institute recently announcing that German business confidence in May remained near record highs following February's 20-year peak.

Looking ahead, we expect to see further strong performance from German equities over the coming months as we target firms with good growth prospects and strong balance sheets.

At the top end of the market, we strongly favour pharmaceutical giant Bayer (LSE: BYR). Looking at the company's pharmaceutical division, the market continues to undervalue the growth potential in Xarelto, a drug primarily aimed at surgical patients who are at risk of developing venous thromboembolism. Elsewhere, business conditions across Bayer's non-pharmaceutical divisions remain robust, while we also see a strong possibility that new CEO Dr Marijn Dekkers will reshuffle the firm's portfolio over the coming months, to the benefit of shareholders.

Another stock we like in the current climate is technology group Rheinmetall (Xetra: RHM). We have favoured it for some time although recent performance has been constrained by fears that its defence business will suffer from government budget cuts. However, the company recently announced better-than-expected results and we expect future growth to be increasingly driven by its automotive components business, a clear beneficiary of strong domestic car sales.

Prospects for the firm's defence business are also stronger than currently priced into the market. Looking ahead, we expect the growth catalyst from this part of the business to come from overseas contracts from countries such as Australia, Brazil, India, South Africa and Turkey. While the timing of these announcements is tough to predict, a patient investor should be handsomely rewarded.

Finally, bicycle manufacturer Derby Cycle (Xetra: DCT) has also recently delivered strong results we see a strong long-term growth story here. Although the firm's share price has risen sharply since its initial public offering in the first quarter of the year, the stock remains attractively valued with a p/e ratio of around ten times and forecast earnings growth of more than 15% over the next 12 months.

Derby is particularly well placed to capitalise on the growth in demand for electric bikes, a segment of the market where the company enjoys a strong position and has witnessed significant sales growth. Netherlands-based competitor Accell recently acquired a 5% in Derby. Rumours of a full takeover may well act as an extra tailwind over the rest of 2011.