Since the start of the new year, stock markets have experienced significant volatility as initial optimism President Donald Trump’s relection was overshadowed by his tariffs on Mexico, Canada, and China. The need for quality stocks with established business models and steady profits has become critical as the S&P 500 Index ($SPX) and the Nasdaq Composite Index ($NASX) enter correction territory as a result.
Morgan Stanley strategist Michelle Weaver and her team have pinpointed companies that appear well-positioned to thrive in such erratic conditions. Weaver’s research suggests that selling stocks during a market correction may be premature, given that bear markets are relatively rare. She further emphasized that companies with solid earnings, low debt, and stable dividend payouts stand out in these turbulent times.
Among these high-quality picks, Microsoft (MSFT) and Ferrari (RACE) are particularly attractive investments. Both companies have loyal customer bases and are consistently profitable, with decent dividend payouts. Together, they offer a beacon of hope amid ongoing market turbulence.
Stock to Buy #1: Microsoft
Based in Redmond, Washington, Microsoft (MSFT) is a leading tech giant with a diverse portfolio that spans hardware, software, and the widely adopted Microsoft 365 suite. Its cloud segment, including Microsoft Intelligent Cloud and Azure, has emerged as a powerhouse, contributing over $25 billion to nearly $70 billion in total quarterly revenue for the second quarter of its fiscal 2025. This high-margin division is not only the fastest-growing arm of the company, but also a critical driver of its overall performance.
Microsoft is also making a major push in artificial intelligence, planning to invest $80 billion this year. This commitment aims to boost efficiency across its current platforms and build new AI and data center services for its cloud customers. Additionally, the tech firm boasts a large market cap of around $2.9 trillion.
Unlike its tech peers, Microsoft failed to spark a meaningful rally in 2024, a year when many companies posted record gains. Unfortunately, it has been down 8% over the past 52 weeks. This underperformance can be linked to heavy spending on AI, which has squeezed its free cash flow and raised profitability concerns. Additionally, execution issues within its Azure cloud business have resulted in slower-than-expected growth, further fueling investor worries.
Following the stock decline, MSFT’s valuation has entered attractive territory. Its forward price-earnings ratio of 30x is now trading below its 5-year average of 34x, although it remains above the sector average of 21.9x.
Microsoft distributes an annual dividend of $3.32 per share, a 10.7% increase from last year, and it is expected to grow by a similar percentage this year. This results in a dividend yield of 0.9%, which is quite respectable for a mega-cap tech stock.
The best aspect of Microsoft's business is that the company generates strong revenue across all segments. In its latest quarterly results, the company reported revenue of $69.6 billion, of which the full Intelligent Cloud segment, including Azure, Windows Server, and enterprise services, generated $25.5 billion, up 19% year over year. Revenue from Productivity and Business Processes increased 14% to $29.4 billion during the quarter.
Microsoft’s substantial investments in AI continue to capture investor attention. The company is ramping up its infrastructure and chip spending to support increased workloads, and it remains the principal investor in OpenAI, the creator of ChatGPT.
Looking ahead, analysts expect full-year revenue of $277 billion, while EPS is forecast to climb to $13.18. If these targets are achieved, both figures will be much higher than those of the prior year.
Overall, Wall Street analysts are highly optimistic about MSFT stock prospects, with a consensus “Strong Buy” rating. The average mean price target of $506.63 indicates an expected 30% upside potential.
Stock to Buy #2: Ferrari
Ferrari (RACE) is recognized as the most famous and stylish brand in the automotive industry. In 2020, Ferrari scored 94 out of 100 on the Brand Strength Index (BSI), solidifying its position as the strongest brand worldwide. The company has a diverse portfolio, generating 85% of its revenue from car sales and 15% from commercial activities, sponsorships, and financial services provided to its loyal customers.
Valued around $84 billion by market cap, shares of Ferrari are up 6.6% year to date, thanks to its steadily growing business.
Following the recent run-up, Ferrari shares are now trading at a premium of 50x earnings, significantly higher than the sector average of 14x. Investors should understand that brands like Ferrari are valued more for their brand strength rather than their business model, as investors pay a premium for brand value. However, this lofty metric is expected to decline as analysts project EPS growth, with the company’s earnings predicted to reach $9.90 by the end of 2025. This implies a fair value of approximately $414 per share, corresponding to a 45x P/E ratio.
Recently, the company announced a significant dividend payout increase. Ferrari stated it will raise its annual dividend to 2.986 Euros per share, yielding 22%.
Last month, Ferrari reported its Q4 and full-year earnings, surpassing estimates on both lines. For the final quarter, revenue came in at $1.85 billion, marking a 14% year-over-year increase, while EPS of $2.28 beat the consensus estimate of $1.89 per share.
Ferrari has consistently achieved rising sales and profits due to its efficiency and scale. In fiscal year 2024, its EBITDA increased by 13.5% to $598 million.
Furthermore, the automotive company boasts strong cash flow, with a solid $1.56 billion balance, a notable 8% increase from the previous year. This robust cash flow reflects operational efficiency and positions the company for further investments and production expansion.
Analysts are moderately bullish on Ferrari stock, with a consensus “Moderate Buy” rating. The average 12-month price target of $528.55 suggests more than 16% upside potential from the current price.
