5 Top Stocks to Buy in May

Earnings season is officially here. As per usual, there have already been epic sell-offs and run-ups across well-known names.

However, long-term investors know that the best way to view a quarterly earnings report is within the context of an investment thesis rather than the market's knee-jerk reaction to short-term results. That's exactly how these Motley Fool contributors discuss Microsoft (MSFT -0.19%), Pfizer (PFE -1.07%), NextEra Energy (NEE -0.40%), Home Depot (HD 0.08%), and Fiverr International (FVRR 0.08%) Here's why all five companies that have what it takes to be solid long-term investments and are worth buying in May.

Image source: Getty Images.

Microsoft shows no signs of slowing down

Daniel Foelber (Microsoft): Microsoft continues to achieve impeccable financial results. While artificial intelligence is a key driver of its growth, the sustained expansion of its cloud business has taken the company's results to new heights.

Ultimately, it doesn't matter which segment contributes the most growth as long as the overall performance improves. However, Microsoft continues to grow sales and margins across its segments. This one-two punch is a dream come true for investors because it shows Microsoft is becoming even more of a cash cow by generating more operating income from each dollar in sales.

In the recent quarter, Microsoft grew its Intelligent Cloud revenue by 21% year over year and boosted the segment operating margin to 46.8% -- which is incredibly efficient. Here's a look at how each of the company's three segments is doing.

Data source: Microsoft.

Microsoft's high-margin operations give it plenty of excess cash to reinvest in the business, make acquisitions, take risks, and boost its capital return program. In the recent quarter, it repurchased $4.21 billion in common stock and paid $5.57 billion in dividends, compared to $4 billion in buybacks and the same dividend expense the prior quarter.

Microsoft continues to be about as close to a perfect business as possible. The only problem is that its success is well-known, which is why it's the most valuable company in the world and sports a 36.8 price-to-earnings ratio. It's not cheap, but that's arguably a fair price for a company growing its top and bottom line at the pace of Microsoft, especially when factoring in all its other qualities, like a rock-solid balance sheet and the numerous advantages of its market position.

The stock has made epic gains in recent years, but the underlying business is stronger than ever, giving investors the green light to buy it in May.

A compelling contrarian pick

Keith Speights (Pfizer): I'll readily admit that Pfizer might look like a horrible choice for investors to buy in May. However, I think there's a compelling contrarian case for this beaten-down big pharma stock.

Pfizer's sinking revenue, earnings, and share price share the same culprit: falling demand for its COVID-19 products. The good news, though, is that the company's year-over-year comparisons should be less challenging after this year. Pfizer could even enjoy a rebound in COVID-19 sales if it wins approval for the combination COVID-flu vaccine currently in late-stage testing.

Some investors worry about Pfizer's looming patent cliff. Several of the company's top drugs face patent expirations over the next few years, including breast cancer drug Ibrance and autoimmune disease drug Xeljanz. Pfizer projects these losses of exclusivity will negatively impact its annual sales by roughly $17 billion by 2030.

I'm confident the company will be able to overcome these challenges. Why? Pfizer has launched an impressive number of new products (and new indications for already-approved drugs) in the last couple of years. It expects these launches will generate around $20 billion in additional annual revenue by 2030. Considering the caliber of the new products and indications, I think this target is attainable.

Pfizer has also used the huge amount of cash it made from its COVID-19 products during the heyday of the pandemic to buy smaller drugmakers. The company predicts that these deals and other transactions will increase its annual revenue by $25 billion within the next six years. This figure doesn't seem too high to me, especially with the acquisition of Seagen closing in December 2023.

There are two other big pluses for Pfizer: its dividend and its valuation. The drugmaker's dividend yield tops 6.4%, which should boost the stock's total return nicely. Pfizer's shares trade under 11.9 times forward earnings -- a big bargain in a market priced at a premium.

Time to reconsider this dividend growth stock

Neha Chamaria (NextEra Energy): NextEra Energy stock lost nearly 23% of its value last year as fears of a potential dividend cut gripped investors in the wake of persistently high interest rates. NextEra Energy, however, has continued to grow in recent months and just reaffirmed its medium-term growth goals, including dividend growth. So, if you still haven't considered adding this utility dividend growth stock to your portfolio, now's the time.

NextEra Energy recently delivered a strong set of first-quarter numbers, growing its adjusted earnings per share (EPS) by 8.3% year over year. The company expects to grow its dividend per share by around 10% per year through at least 2026, off a 2024 base, driven by a projected 6% to 8% growth in adjusted EPS for 2025 and 2026, respectively. Management expects to hit its adjusted EPS range's top end by 2026.

Two factors should drive NextEra Energy's earnings and cash-flow growth -- a stable traditional utility business called Florida Power & Light Company and a steadily growing renewable energy arm named NextEra Energy Resources (NEER). While FPL is America's largest utility, the first quarter was NEER's second-best quarter ever as it added nearly 2.7 gigawatts (GW) of renewables to its portfolio. It now has a backlog of 21.5 GW, which is huge, given that NEER had roughly 36 GW in operation as of Dec. 31, 2023.

With NextEra Energy also restructuring operations in recent months -- including selling its natural gas assets -- to ensure it can grow cash flows and support dividends even in a high-interest-rate environment, investors who sidelined the 3%-yielding stock so far have a good reason to jump back in now.

Spring cleaning time

Demitri Kalogeropoulos (Home Depot): Most retailers can't wait until the Christmas holiday season, but for Home Depot, it is the spring that really matters most to the business. Consumers flood its stores to purchase seasonal merchandise, and ambitious home improvement projects get started in earnest once the weather turns warmer across the U.S. That fact makes May a critical month for the business and its shareholders.

The home improvement giant is slated to report its fiscal first-quarter earnings results on May 16, right in the middle of that demand surge. Management will then have a clearer view of Home Depot's growth potential for the 2024 year. Heading into the announcement, expectations are for comparable-store sales to decline by about 1% this year after dropping 3% in 2023. Home Depot is facing a growth hangover from the pandemic, combined with weaker demand driven by a softer housing market.

CEO Ted Decker and his team will update investors on these key challenges in a few weeks. In addition to those comments, I'll be watching Home Depot's customer traffic trends, which were negative last year but improved to a 1.7% drop in the fiscal fourth quarter. Another move toward positive results would be a good sign of stabilization ahead.

In any case, this retailer stock looks attractively priced after its recent decline. You can own Home Depot for 2.2 times sales now, down from nearly 3 times sales a few weeks ago. Sure, the prospect of more sluggishness in the housing market raises the risk that the chain will see weaker sales over the next few quarters. However, Home Depot has thrived through many previous industry downturns and is likely to set annual earnings records in a few years.

This pandemic winner never stopped growing

Anders Bylund (Fiverr): Many investors saw Fiverr International as a pandemic play. The freelance services wrangler's stock soared in the lockdown phase of the COVID-19 crisis, then started a long and painful plunge when vaccines became widely available, and the era of remote work ran into a brick wall. The stock's trajectory from 2020 to 2022 is strikingly similar to other lockdown winners, such as Netflix and Zoom Video Communications:

FVRR data by YCharts

These days, Wall Street is embracing Netflix's long-term business plan again, but Zoom and Fiverr are trading roughly 90% below their four-year highs.

And Fiverr never got the memo about that growth-ending brick wall.

After a brief inflation-based pause, Fiverr's top line is back to robust growth again, and the company never stopped making money:

FVRR Revenue (TTM) data by YCharts

Fiverr's 4.1 million active freelance service buyers are increasing their average spending while Fiverr hangs on to a larger slice of the fees per service.

The latest bearish argument against Fiverr is the AI boom. Critics say that human freelancers are less relevant in a world of powerful generative AI tools. But Fiverr's management disagrees -- human experts are still controlling the AI bots, a popular service category on Fiverr's marketplace.

"Overall, we estimate AI created a net positive impact of 4% to our business in 2023, CEO Micha Kaufman said in February's fourth-quarter earnings call. "We see a category mix shift from simple services such as translation and voice-over to more complex services such as mobile app development, e-commerce management or financial consulting."

Does that sound like an obsolete business on its deathbed? I don't think so, but that's what Fiverr's stock chart looks like. Shares are changing hands for less than 10 times free cash flows and 2.2 times sales, and both of the underlying financial metrics are growing quickly.

Fiverr is scheduled to report earnings again on May 8. I can't promise that this update will turn the stock chart around in a hurry. In due time, the steady drumbeat of strong reports should release Fiverr from inaccurate investor worries. This stock may have been too pricey in 2021 but it also looks deeply undervalued today.