Value Investing in 2026: A Discipline for Uncertain Times

The market's performance in 2025 tells a clear story of growth's dominance. Despite a mid-year rotation into value, the final returns were decisive: the S&P 500 Growth index returned 19.9% for the year, decisively outpacing the S&P 500 Value index's 12.3%. This surge, fueled by a post-April rebound in tech and growth stocks, has left the broader market at elevated levels. The S&P 500's trailing P/E ratio is back near 29, but the more telling metric is the Cyclically Adjusted PE Ratio (CAPE) at 40. That figure, higher than the 2021 peak and only surpassed by the dot-com bubble, signals a market priced for perfection.

Yet, within this overvalued landscape, a classic value opportunity emerges. Morningstar research indicates that while growth stocks trade at a modest premium to their intrinsic value, value stocks are currently undervalued on a price-to-fair-value basis. This disconnect is the core of the investor's dilemma. The market's relentless focus on AI-driven growth has pushed valuations to extremes, but it has also left many high-quality, cash-generating businesses trading at a discount. The elevated CAPE ratio suggests the entire market is vulnerable, but it also means that the margin of safety for disciplined investors is now more pronounced than it has been in years.

The setup is one of patience versus momentum. The growth rally has been powerful, and sentiment remains skewed toward tech. However, the historical pattern is clear: periods of extreme concentration and stretched valuations often precede a reversion. For the value investor, the question is not whether growth will continue, but whether the current price of that growth leaves room for error. The evidence suggests it does not, while simultaneously highlighting a group of companies whose fundamentals and valuations are misaligned. This is the disciplined opportunity: to buy quality at a discount when the market is distracted by its own exuberance.

The Value Investor's Toolkit: Wide Moats and Intrinsic Value

The disciplined pursuit of value is a framework, not a checklist. At its core, it is a search for durable businesses trading at a discount to their true worth. This requires a two-part lens: first, identifying companies with a wide economic moat, and second, ensuring the purchase price provides a sufficient margin of safety.

A wide moat is the foundation. It represents a durable, material competitive advantage that allows a company to earn excess returns on capital for a long period, keeping rivals at bay. As Morningstar analysts define it, this is the key to sustained superior profitability "a durable, material competitive advantage". These advantages can take many forms-strong brand loyalty, pricing power, significant economies of scale, high customer switching costs, or regulatory protections. The goal is to find businesses like The Estee Lauder Companies, Caterpillar, or S&P Global, which operate in industries with high barriers to entry, making it difficult for competitors to challenge their positions. This moat provides resilience, allowing the company to navigate market turbulence and maintain stable profit margins even in downturns.

The second pillar is the margin of safety. This is the disciplined rule that you only buy when the market price is significantly below your estimated intrinsic value. As the core principle of value investing states, you must "only invest when the stock's price is well below your intrinsic value estimate". This creates a financial cushion against error and uncertainty. The Morningstar criteria explicitly link this to the companies on its "Best Companies to Own" list, which are not only wide-moat but also "trading below Morningstar's fair value estimates". The math is simple: the wider the gap between price and value, the greater the potential return and the lower the risk of permanent capital loss.

To operationalize this, the value investor looks for three supporting traits. First, predictable cash flows are essential. A wide moat should translate into steady, reliable earnings and free cash flow, which can be reinvested or returned to shareholders. Second, consistent management capital allocation is critical. The best companies deploy capital wisely, whether through strategic investments, dividends, or share repurchases. Morningstar's "smart capital-allocation decisions" rating is a key filter here. Third, a history of shareholder-friendly decisions-like a growing dividend or a buyback program-signals management's confidence in the business and its commitment to returning capital.

The bottom line is one of patience and process. The value investor does not chase growth or hype. Instead, they systematically seek out companies with a wide moat, analyze their intrinsic value, and wait for the market to offer a discount. It is a patient, data-driven approach that has weathered countless market cycles, grounded in the timeless principles of buying quality at a price that makes sense.

Case Studies: Undervalued Wide-Moat Businesses

The Morningstar toolkit provides a clear lens for identifying businesses where a margin of safety meets durable quality. The criteria are straightforward: a wide economic moat, predictable cash flows, and a management team that allocates capital wisely. When these companies trade below their fair value, they present a classic value opportunity. Let's examine several examples from the latest analysis.

First, consider Constellation Brands. The brewer commands a wide economic moat through its portfolio of premium Mexican beer brands like Modelo and Corona. This moat, built on consumer loyalty and distribution strength, provides a stable cash engine. Yet the stock trades at a 42% discount to its $220 fair value estimate. This gap appears to price in near-term demand headwinds, overlooking the long-term resilience of its brands and its innovation pipeline.

Next is Campbell's, a company undergoing a significant turnaround. Its wide moat stems from a portfolio of entrenched consumer brands and retailer relationships. The company is actively streamlining its operations, targeting $375 million in savings by fiscal 2028. Despite this strategic focus, the market has priced the stock at a steep 49% discount to its $60 fair value. This deep discount suggests the market is undervaluing the efficiency gains and brand strength that should support future cash flows.

Verizon Communications offers a different profile. The telecom giant possesses a defensive moat through its essential network infrastructure and is now a key player in the AI infrastructure buildout. Its stock is cheap on a forward earnings basis, with a forward P/E of just 8.5 and a 6.8% dividend yield. More importantly, it has a tangible catalyst: the pending acquisition of Frontier Communications, which could drive significant bundling and cross-selling. This combination of defensive cash flows, a high yield, and a strategic deal creates a compelling setup.

Clorox and Bristol-Myers Squibb round out the picture. Clorox, with its wide moat in household products, is trading at a 35% discount to its $166 fair value. The company's focus on consumer-centric innovation provides a path to growth. Bristol-Myers Squibb, meanwhile, faces a patent cliff but maintains a wide moat through its drug portfolio and pipeline. The stock is valued at a significant discount to its $66 fair value estimate, with the market likely underestimating its ability to navigate the coming patent expirations.

The common thread is a gap between price and intrinsic value, supported by durable business models. For the patient investor, these are not speculative bets but opportunities to buy quality at a discount, where the margin of safety is defined by both the valuation gap and the strength of the underlying moat.

Portfolio Construction for a $1,000 Investment

For the disciplined investor, a small capital sum like $1,000 is not a limitation but an opportunity to build a foundation. The key is to apply timeless principles with consistency. The goal is to construct a portfolio of wide-moat businesses that can compound capital over decades, using a framework grounded in diversification, dollar-cost averaging, and shareholder-friendly capital allocation.

First, diversification is non-negotiable. As the golden rule advises, spread your capital across enough distinct businesses to mitigate company-specific risk, but not so many that you lose the ability to understand each one. A target of 5 to 10 companies strikes the right balance. This means selecting businesses from different sectors-consumer staples, energy, industrials, financials-each with a durable competitive advantage. Morningstar's criteria of a "wide" economic moat is a reliable starting filter, as it suggests a business can defend its profits against competitors over the long term.

Second, deploy the capital through dollar-cost averaging. Instead of investing the entire $1,000 at once, commit to investing equal installments-say, $250 every quarter-for four quarters. This strategy removes the pressure of market timing and averages your purchase price over time. It is a practical application of the principle that "time in the market beats timing the market," allowing you to build a position without needing to predict short-term swings.

Third, prioritize businesses with a proven history of returning capital to shareholders. Look for companies that consistently pay dividends or engage in share buybacks. The Morningstar Dividend Yield Focus Index provides a useful blueprint, highlighting stocks like PepsiCo and Mondelez with wide moats and shareholder-friendly policies. These are not just high-yield traps; they are businesses with the financial strength and management discipline to sustain and grow payouts through cycles.

The bottom line is one of disciplined execution. Start by identifying 5-10 wide-moat companies that meet your criteria. Then, commit to a quarterly investment plan. This approach transforms a small sum into a systematic, long-term investment in quality businesses, aligning perfectly with the patient, value-oriented mindset.

Catalysts, Risks, and the Patient Investor's Path

For the value investor, the path forward is defined by a clear set of catalysts, a watchlist of risks, and an unwavering commitment to a disciplined, long-term approach. The setup for companies like Campbell's, Constellation Brands, and others on Morningstar's list is one of potential reversion to mean valuations, execution of announced plans, and a broader market rotation that favors quality at a discount.

The primary catalyst is valuation reversion itself. These stocks trade at significant discounts to Morningstar's fair value estimates, with Campbell's at just 51% of its $60 fair value and Constellation Brands at 58% of its $220 estimate. This gap is not a fleeting anomaly but a reflection of persistent market sentiment favoring growth. A shift in that psychology, perhaps triggered by a slowdown in AI-driven growth or a reassessment of risk, could close this gap. A second, more tangible catalyst is the successful execution of announced cost-saving plans. Campbell's, for instance, has a $375 million savings target through fiscal 2028, on top of $950 million already realized. Delivering on this would directly boost margins and cash flow, providing a near-term floor for the stock and validating management's capital allocation. The third catalyst is a broader market rotation. As the growth stock rally shows signs of fatigue, the market's focus may return to the defensive, cash-generating power of wide-moat consumer staples and healthcare companies, offering a natural home for value capital.

The risks to monitor are equally specific. First, persistent economic weakness could pressure consumer staples, directly impacting sales and margins for companies like Campbell's and Clorox. Second, the failure to execute strategic plans-whether it's Campbell's cost savings, Constellation's innovation pipeline, or Bristol-Myers Squibb's patent cliff management-would undermine the fundamental case for revaluation. Third, and most structural, is the continued outperformance of growth stocks. The Morningstar data shows growth has outpaced value by around 10 percentage points in 2025, and if this trend persists, it could keep these stocks undervalued for an extended period, testing the investor's patience.

For the patient investor, the path is one of principle. It requires maintaining a long-term horizon, recognizing that value compounding often unfolds over years, not quarters. It means avoiding the futile exercise of market timing, which the evidence suggests is a losing game for most. Instead, it involves using volatility as an opportunity. When a stock like Campbell's trades at a 49% discount, that dip is not a warning but a potential entry point for a margin of safety. The Morningstar criteria provide a clear framework: focus on wide moats, predictable cash flows, and smart capital allocation. By adhering to these principles, the investor builds a portfolio not of speculative bets, but of durable businesses trading below their worth. The goal is not to predict the next market move, but to be prepared for it, with quality holdings that can compound through any cycle.