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The Dow Crashes 665 Points -- Here Are 3 Top Stocks to Buy

By Todd Campbell - Feb 3, 2018 at 9:45AM

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The stock market turned lower Friday, and that might not be bad news for investors.

A seemingly endless streak of stock market gains was derailed on Friday when the Dow Jones Industrials tumbled 665 points. The drop-off brought the Dow's loss on the week to 4.1%, but investors might not want to fret too much. After all, the index is up 28% over the past 12 months, and that means it's been a while since we've been able to buy top stocks on sale. 

There's no telling when the market will find its footing and begin climbing again, but when it does, I think buying Pfizer (PFE -0.23%), Diamond Offshore (DO), and (AMZN 3.15%) shares on sale in long-term portfolios could be a no-brainer.

A businessman yells into a megaphone while standing in front of a background displaying a world map and stock price charts.

Image source: Getty Images.

Income with a growth kicker

Drug demand is pretty inelastic, and that means that even if the stock market falls for an extended period, any fallout to the economy isn't likely to put much of a dent in Pfizer's sales. Pfizer remains one of the world's biggest biopharmaceutical companies, but it's only now that it appears to be overcoming the headwinds associated with losing patent protection in 2011 on Lipitor, the top-selling cholesterol-lowering treatment that was once the world's best-selling drug, with $13 billion in annual sales.

Lipitor's sales are tracking at less than $2 billion per year now, and that suggests the worst could be behind Pfizer. In 2017, its revenue was essentially unchanged from 2016, and in 2018, Pfizer thinks that growing demand for its drugs, including the multibillion-dollar breast cancer medicine Ibrance, will result in sales climbing 4%.

Importantly, Lipitor-inspired cost-cutting should provide plenty of operating leverage as the company's revenue increases. Operating leverage and a lower tax rate because of tax reform have Pfizer guiding for earnings to improve by 11% in 2018.

If Pfizer can drop increasingly more money to the bottom line in the coming years, then income investors could be handsomely rewarded. Its shares already yield a market-leading 3.7%, so future dividend increases because of improving profitability could be a boon.

A drillship heading out to sea.

Image source: Getty Images.

One if by sea

ExxonMobil (XOM 2.23%) was a big loser in Friday's market tumble after it reported revenue and earnings that were below expectations. Investors didn't like the company's miss, but management hinted at plans for 2018 that could signal better days ahead for offshore energy service stocks, including Diamond Offshore.

Diamond Offshore makes its money by contracting its deepwater rigs to oil and gas companies, and frankly, that's been a horrible business to be in since oil prices began falling in 2014. Offshore exploration and production is more costly than drilling and producing oil and gas on land, especially when compared to U.S. shale sites, and as a result, oil and gas capital expenditures on deepwater projects have fallen significantly -- until now.

Oil prices have been making their way higher, and growing global GDP growth and planned supply cuts by OPEC have weighed down oil inventories, despite a pickup in U.S. shale production. With commodity prices back to levels where offshore activity is more competitive, a shift in budgets back toward the sea could boost Diamond Offshore's rig utilization and provide it with pricing power again.

Admittedly, it's still early days in the recovery, and there's no guarantee that offshore will return to its former glory, but ExxonMobil and others appear to be more interested in diversifying their oil and gas reserves. If so, that would be good news for Diamond Offshore's investors. ExxonMobil highlighted a number of offshore successes in its earnings release, and in its fourth-quarter slide deck it indicated it would increase its capex budget to $24 billion in 2018 from about $23 billion in 2017. I imagine some of that money is destined for offshore projects, especially since ExxonMobil just secured new acreage offshore of Brazil, and since ExxonMobil's a good proxy for the industry, Diamond Offshore may soon be back to its winning ways.

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Image source: Getty Images.

The big kahuna

Amazon is far more than an online Goliath. Its Amazon Web Services (AWS) business makes it one of the biggest cloud technology vendors, and its digital media and consumer electronics solutions position it perfectly to benefit from the next decade's biggest technology trends, including the Internet of Things and artificial intelligence. 

A supply chain dynamo, Amazon is perhaps the most feared player in retail, yet there's still plenty of market share left for it to win away from its competitors. According to the U.S. Census Bureau, e-commerce sales were up 15.5% year over year entering Q4 2017, yet they only represented 8.4% of total retail sales; and despite Amazon's sales climbing 31% to $178 billion in 2017, Walmart's (WMT 0.86%) trailing-12-month sales are still 178% higher than Amazon's revenue last year.

Amazon's AWS business only represents about 10% of its revenue, but it's proving to be an incredible cash cow for investors. In Q4, its sales increased 45% year over year to $5.1 billion, and they totaled $17.5 billion in 2017. Q4 operating income was $1.35 billion at AWS, so it was a big reason why Amazon's companywide operating income soared 69% year over year to $2.1 billion last quarter. Importantly, I don't think AWS profit tailwinds are going to fade anytime soon. Why? Because an increasingly digital world is creating data at an exponential pace, and companies like AWS that store and analyze that data will be the big beneficiaries of that trend.

No, Amazon isn't a cheap stock, but its ability to grow at an envy-inspiring pace is truly impressive given its size. With more market share to capture in retail, a technology business that's humming along, and innovation that could allow it to disrupt additional markets, I think it deserves being a core stock in growth portfolios.

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Stocks Mentioned, Inc. Stock Quote, Inc.
$109.56 (3.15%) $3.35
Pfizer Inc. Stock Quote
Pfizer Inc.
$52.31 (-0.23%) $0.12
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$122.63 (0.86%) $1.05
Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
$87.55 (2.23%) $1.91
Diamond Offshore Drilling, Inc. Stock Quote
Diamond Offshore Drilling, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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