2 Beaten-Down Stocks That Are Great Buys on the Dip

Even when equities are volatile, investors can find great stocks to buy. And the rules for investing in the current environment aren't that different, at least for those focused on the long game: Find quality stocks likely to survive the somewhat challenging period we are experiencing and perform well over five years or more.

If these stocks happen to be down significantly for the year -- perhaps due to marketwide issues or company-specific headwinds -- that's even better, provided they have what it takes to rebound. Let's consider two stocks that have lagged the market this year but still look like great long-term options: Amazon (NASDAQ: AMZN) and Merck (NYSE: MRK).

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1. Amazon

President Donald Trump's trade policies are creating significant economic uncertainty. Amazon, an e-commerce specialist, would suffer if the situation evolves into a full-blown recession.

That's causing investors to pause and reassess, and the tech giant's recent quarterly update did not improve things. Though the results were solid, second-quarter guidance was weak, which did nothing to assuage investors' fears.

Still, there are several important things to note about the recent quarterly report. Most of all, its cloud business, Amazon Web Services (AWS), continues to grow rapidly. In the first quarter, the company's net sales increased by 9% year over year to $155.7 billion. AWS revenue jumped by 17% year over year to $29.3 billion.

Management continues to see significant white space for this business, especially with the addition of artificial intelligence (AI) based services.

As CEO Andy Jassy said: "Before this generation of AI, we thought AWS had the chance to ultimately be a multi-hundred-billion-dollar revenue run rate business. We now think it could be even larger."

AWS' incredible pace and strong margins will continue to work wonders for the company's profits. Though there might be some near-term uncertainty, this opportunity paints a bright picture for Amazon's future beyond the issues it is facing.

And that's before we add other parts of the business. Its advertising unit is yet another high-margin, high-growth opportunity. Amazon is one of the most visited websites in the world, and its main website has network effects, so there is massive white space there as well.

Furthermore, management is making significant strides elsewhere, particularly with its healthcare-based initiatives. Amazon Pharmacy is managing to disrupt an industry that large and well-established businesses have long dominated.

Beyond any specific opportunity it is pursuing, Amazon's greatest strength might be its ability to identify and pursue lucrative opportunities successfully. That and the company's massive ecosystem of more than 200 million Prime members, who grant it significant monetization potential.

So, although Amazon's shares might remain volatile in the next few months, the company's long-term prospects are intact. That's why investors should purchase its shares on the dip.

2. Merck

Merck's woes predate the current economy. The company's shares have been falling because its biggest drug, cancer medicine Keytruda, could soon get more competition, especially in one of its most important markets, non-small cell lung cancer (NSCLC).

Its biggest would-be competitor is ivonescimab, a medicine being developed in the U.S. by Summit Therapeutics. It delivered positive clinical trial results in China in a phase 3 study in which it went head-to-head against Keytruda.

However, there is more to the story. First, ivonescimab has yet to show a statistically significant improvement over Keytruda in overall survival in NSCLC patients in a key Chinese study.

Second, Keytruda has been on the market for much longer, and its first-mover advantage is a strength. Consider that it was first approved in the U.S. in 2014. It took the medicine until 2022 -- eight long years -- to serve one million patients. Management then predicted it would take just two more years to double that total.

That's partly because it's much easier for well-established brands to get physicians and patients on board. It's also because, since 2014, Keytruda has had time to rack up an impressive number of indications -- it has over 30 in the U.S.

Even with mounting competition, Keytruda will have a leg up. And though it will run out of patent exclusivity in 2028, Merck is working on a subcutaneous version of it that will extend its patent life and help drive top-line growth into the next decade.

Elsewhere, Merck's vaccine business, powered by human papillomavirus vaccines Gardasil and Gardasil 9, is still performing well. Newer products like Winrevair, which treats pulmonary arterial hypertension, will contribute meaningfully for a while.

Merck's pipeline features several dozen programs, some of which will eventually lead to brand-new approvals and label expansions, and that's before we touch upon the company's animal business.

Lastly, the stock is a solid dividend choice. It has a juicy yield of 3.9%, compared to the S&P 500's 1.3%, and it has raised its payouts by 80% in the past 10 years. Merck might not be performing well right now, but the company could deliver excellent results to investors who initiate positions, opt to reinvest the dividend, and hold on to their shares for a long time.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Prosper Junior Bakiny has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Merck, and Summit Therapeutics. The Motley Fool has a disclosure policy.