In the long term, stocks with wide economic moats deliver higher returns due to their competitive advantages. They can protect their market position and profits to achieve higher returns. Due to their high returns over the long term, they are the best stocks to buy on dips.
Typically, investors focus on growth rates when looking for the best long-term stocks. Instead, the right metric to examine is the sustainability of their growth and return on invested capital. Businesses that can sustain these two metrics for a long time are more valuable in the market.
Therefore, the best stocks to buy now and dollar cost average on dips are wide-moat stocks. First, these businesses provide essential products and services that guarantee demand. Secondly, these stocks are market leaders in a monopoly or duopoly position. Thus, they can sustain their sales growth.
Thirdly, due to their entrenched market position, they generate higher returns on capital than the average company. Ultimately, these higher returns result in higher cash flows that are reinvested into strengthening the business or paid out to shareholders.
Below we highlight some of these stocks to buy on dips. They are economic powerhouses with a long growth and profitability runway.
Amazon (NASDAQ:AMZN) is the quintessential buy-the-dip stock. It’s prevalent in everyday life as consumers increasingly rely on it for daily shopping. Over the years, it has built an unassailable position in online retail. Besides retail, its Amazon Web Services (AWS) division is a leader in cloud computing.
In retail, Amazon applies the scale economies shared model to colossal effect. Amazon Marketplace and online stores aim to provide the lowest cost items to consumers. As a result, more and more customers flock to the site looking for bargains.
In turn, increasing customers bring in more producers and third-party sellers who desire to reach a larger market. Due to more sellers, Amazon’s selection and breadth of products increase, attracting ever-increasing traffic on its site.
As a result, sales and profits rise. But instead of distributing these profits, Amazon leverages economies of scale to lower costs further and improve customer experience. Due to lower prices and faster delivery, its customers keep on growing. This virtuous cycle creates the Amazon flywheel.
The retail business is already massive, generating over $514 billion in revenues in fiscal year (FY) 2022. But the business is far from saturation. Online retail comprises 22% of all global retail spending, leaving plenty of room for growth.
The other growth lever is its cloud computing business AWS. As a pioneer in the industry, AWS enjoys a significant 32% market share. Yet, lots of computing and data are still on-premise. Sales in the segment will grow as these workloads migrate to the cloud over the subsequent decades.
These two businesses’ strengths make Amazon one of the wide-moat stocks to buy on dips. Additionally, the business has other rapidly growing segments such as Prime Video, Advertising, and Fulfillment by Amazon that enhance its flywheel.
This Redmond, California-based giant has won over enterprise customers with its productivity tools. Every day millions of users rely on Microsoft (NASDAQ:MSFT) tools such as Office 365, Teams, and GitHub, to perform routine tasks. The widespread usage of these tools has led to a robust network effect for Microsoft products.
Due to its dominance, the company has consistently generated prodigious cash flow. It has one of the best profit margins and ROICs in the stock market. For instance, in fiscal year (FY) 2022, its operating margins were 40%. Also, the company gushes free cash flow, which it deploys into research and development and shareholder returns.
As a shareholder-friendly company, it uses these excess cash flows to buy back stock and pay dividends. According to the Q3 FY 2023 10Q, it spent $13.8 billion on share buybacks for the nine months ended March 31. Over the same period, the company paid $0.68 per share of quarterly dividends.
The rosy outlook makes Microsoft one of the top stocks to buy on dips. The company is at the forefront of the AI boom. It has invested massively in AI research and owns a significant stake in OpenAI. Already, these investments are bearing fruit.
On July 18, the company announced Bing Chat Enterprise and Microsoft 365 Copilot for customers. Priced at $30 per user, these products will bring productivity to work. This announcement is just an indicator of the revenue opportunities ahead. Expect the company to leverage its user base to sell additional AI products.
Boeing (NYSE:BA) enjoys a duopoly in the aircraft manufacturing industry. It shares the market with French rival Airbus SE (OTCPK:EADSY). Due to this established duopoly, the two firms enjoy consistent demand from airlines with limited competition.
The aircraft manufacturing industry has several barriers to entry. First, the industry is very highly regulated. Due to the catastrophic risks of airplane failures, manufacturers face a thorough certification process from regulators like the Federal Aviation Administration (FAA).
Secondly, aircraft manufacturing is highly sophisticated and capital-intensive. The manufacturer must coordinate production with thousands of certified suppliers of aircraft parts. Plus, large-scale manufacturing requires large amounts of capital that keeps competition away.
So why is Boeing one of the best stocks to buy on dips? After several years of catastrophic blunders that led to the grounding of the 737 Max, the company is back on track. Regulators like the FAA have certified the plane to return to the clouds.
Tailwinds are aligning for Boeing. After the pandemic slump, air traffic has rebounded strongly. Recently, the Transportation Security Administration (TSA) announced that June 30 set the record for the highest number of individuals screened in airports in the U.S.
Due to the soaring travel numbers, airlines are expanding their capacity, and Boeing is receiving numerous orders. For instance, in May, it signed an agreement to deliver 300 Boeing 737-10s to one of its largest customers Ryanair Holdings (NASDAQ:RYAAY). As a result, Boeing’s backlog has surged to record levels. In Q1 FY2023, the backlog was $ 411 billion for over 4,500 commercial airplanes.
That’s why it’s a stock to buy on the dips. As Boeing resolves the remaining supply chain issues, its production will gradually increase. Cashflows will rebound to the previous record highs set in FY2018.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.