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Stock investors usually look to buy on weakness, proverbially known as “buying the dip”. The key ingredient is to find companies with sound fundamentals that aren’t appreciated as they should be. More so if their long-term growth is not fully accounted for.

Now that the latest CPI report indicates an inflation downtrend, there is less risk of further interest rate hikes. Compared to prior months, fed fund futures show hike probabilities under 1 percent. 

This makes it easier to predict borrowing costs for operations and expansions and servicing existing debt. Most importantly, even if companies are fairly valued, do they have the cash flow stamina to power through a potential recession?

With that in mind, investors should take note of these three stocks that have a proven track record of profitability and have ample space for growth.

Microsoft (Nasdaq: MSFT)

The staple software giant has enormous blue-chip weight in the S&P 500. Together with Apple, the magnificent duo makes for 13.9% of the market benchmark. In the latest Q1 FY24 earnings report, Microsoft beat revenue and earnings per share (EPS) estimates, per LSEG.

Compared to the expected $2.65 EPS, Microsoft reported $2.99, exceeding the expected $54.50 billion revenue at $56.52 billion. Following October’s report, MSFT shares jumped 11% to date. Polled LSEG analysts are now expecting 15% growth in the next quarter. However, some indicators point to the beginning of Microsoft’s growth acceleration.

The revenue from Microsoft’s Azure cloud service increased 29% quarterly. Under the umbrella of Intelligent Cloud, this core business segment beat the $23.49 billion revenue forecast at $24.26 billion, marking $19% growth. Yet, it is still heavily unutilized.

Only recently, on November 9th, did the company make the landmark Microsoft 365 Copilot available, previously in public preview. This AI-powered productivity suite elevates all existing flagship products, from Word and Excel to PowerPoint, Outlook, and Teams. 

In other words, building on the 70% Windows dominance in the global operating system (OS) market, Microsoft will most likely spearhead the AI boom and reap the benefits. Azure’s OpenAI Service has increased from 11,000 clients to 18,000 in the last three months.

Based on 40 analyst inputs pulled by Nasdaq, MSFT stock is a “strong buy.” The average MSFT price target is $408.89 vs the current $371. The high estimate is $450, while the low forecast is above the present price, at $375 per share. 

Merck & Company (NYSE: MRK)

This global healthcare company mainly focuses on pharmaceuticals, which is responsible for generating the bulk of its revenue alongside consumer and animal care products. As with all pharma companies, Merck’s business model is two-faceted.

The first relies on steady cash flow from established drugs in demand regardless of economic downturns. The second relies on new breakthroughs, paving the road to accelerated valuation. 

In September, the FDA selected Merck’s sotatercept, as pulmonary arterial hypertension (PAH) treatment, for priority review set on March 26, 2024. Merck would tap into an extra $7.5 billion market by 2026 if approved.

Likewise, the FDA granted Merck Breakthrough Therapy Designation for V116, an innovative21-valent pneumococcal conjugate vaccine for invasive pneumonia disease(IPD) in adults. It is presently in Phase 3 clinical trials. 

Most importantly, the FDA approved Merck’s cancer-treating drug, pembrolizumab (Keytruda), on November 16th. By blocking certain protein interactions, the drug holds promise to treat a wide range of cancers, from melanoma and cervical cancer to common non-small cell lung cancer (NSCLC).

Based on 23 analyst inputs pulled by Nasdaq, MRK stock is a “strong buy.” The average MRL price target is $126.18 vs the current $101. The high estimate is $135, while the low forecast is $115, again above the present MRK price per share. 

Rockwell Automation (NYSE: ROK)

The only “hold” stock out of the three, Rockwell Automation is positioning itself as the Microsoft of industrial automation, providing hardware and software solutions. In Q4 FY23, Rockwell reported a 20.5% uptick in year-over-year sales, but its diluted EPS was down 10% from a year-ago quarter, at $2.61.

Nonetheless, Rockwell’s cash flow more than doubled from a year ago, at $840 million vs $399 million. Despite a slight decrease in operating margin (from 23.3% to 22.3%), Rockwell Automation’s financial performance remains strong. The company heavily invests in research and innovation to maintain the lead in the burgeoning industrial automation market.

By 2032, this market is expected to double, going from $195 billion in 2022 to $459.51 billion. For these reasons, investors should note Rockwell Automation as a long-term growth commitment. 

Based on 19 analyst inputs pulled by Nasdaq, ROK stock is a “hold,” meaning it is not likely to overperform or underperform immediately. The average ROK price target is $280.82 vs. the current price of $274. The high estimate is $337, while the low forecast is $220 per share. 

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