• Bubble-forecasting legend Jeremy Grantham sees plenty of risks in the stock market, but also some opportunities.

• The investor said in a note on Monday that there are four areas of the stock market he would buy.

• "For those who must own US stocks even when they are generally overpriced, there is a reasonable choice of relatively attractive investments," Grantham said.

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GMO co-founder Jeremy Grantham is well-known for forecasting bubbles in the stock market. But he also sees some opportunities that are worthy of investment.

In a note on Monday, while warning about the growing risks of an AI-fueled bubble in the stock market, Grantham offered other insights into where he sees value in the US stock market.

"For those who must own US stocks (most institutions) even when they are generally very overpriced, there is a reasonable choice of relatively attractive investments," Grantham said.

Detailed below are the four areas of the stock market that Grantham believes are worth buying.

1. Quality

While "not spectacularly cheap today," US quality stocks have a long history of outperforming the stock market during bear markets and slightly underperforming during bull markets, according to Grantham.

Altogether, the defensive nature of quality stocks — or those with strong balance sheets, robust cash on hand, and low debt burdens — has led to overall long-term outperformance relative to the broader stock market.

"AAA bonds return about 1% a year less than low-grade bonds – everybody gets it, and always has. In bizarre contrast, the equivalent AAA stocks, with their lower bankruptcy risk, lower volatility, and just plain less risk, historically have delivered an extra 0.5% to 1.0% a year over the S&P 500," Grantham said.

Quality stocks are often defined as companies that have a clean balance sheet with little leverage and a history of delivering stable profits during all economic cycles.

2. Resource stocks

The diversification benefits of resource equities like oil companies and miners make them a worthy consideration for investors, according to Grantham.

"Not only are raw materials finite – believe it or not! – getting scarcer, and therefore certain to rise in price, but at longer horizons (10 years) resources are the only sector of the stock market to be negatively correlated with the broad stock market. They are far and away the most diversifying sector. They are also particularly cheap today having been whacked recently," Grantham said.

3. Climate-related investments

The growing concern about climate-related disasters has led to an increased willingness among governments to take action and invest in long-term solutions, and those investments should ultimately benefit the companies that are working on those solutions.