Two Dow Stocks to Buy and One to Avoid: A Value Investor's 2026 Checklist

The market's recent three-year streak of double-digit gains has set a high bar. The S&P 500 rose , and Wall Street's crystal balls are now polished for 2026. The consensus, however, is a familiar story of bullish forecasts that often miss the mark. As history shows, when the index gains at least 15% in a year, the following year's average return has been about 8%. More importantly, . This pattern is a classic reminder: market gains are rarely a straight line, and the noise of uniform optimism is often the loudest signal of all.

For the disciplined investor, 2026 is not about predicting the market's next move. It is about identifying companies with wide, defensible moats trading at prices that offer a margin of safety. This is the core of a value approach. The concept, popularized by , refers to businesses with durable competitive advantages-whether through brand strength, cost leadership, or network effects-that protect them from rivals. These are the companies that can compound value over decades, not just quarters. As the evidence notes, wide-moat firms typically benefit from strong pricing power, stable profit margins, and the capacity to reinvest in their businesses, reinforcing their advantages.

The challenge is to separate the signal from the noise. Wall Street's uniformly bullish 2026 forecasts are often inaccurate, highlighting the market's tendency to overlook the unexpected. Instead of chasing trends or reacting to short-term volatility, the focus should be on intrinsic value. This means looking past the recent pop in stocks and assessing whether a company's current price adequately compensates for the risk of its future cash flows. It means treating recent market swings as the inevitable noise of a complex system, not as a reliable indicator of long-term direction.

The bottom line for 2026 is a return to fundamentals. The checklist is simple: seek businesses with wide moats, buy them when the price offers a margin of safety, and then wait. The market's path will be uncertain, but the principle remains constant.

The Two Buys: Caterpillar and S&P Global

For the value investor, the search for durable competitive advantages leads directly to two Dow stalwarts: Caterpillar and S&P Global. Both exemplify the wide-moat thesis, possessing the kind of entrenched positions that allow them to compound value through economic cycles. Their current valuations, after recent market moves, appear to offer a margin of safety that rewards patience.

Caterpillar's moat is built on the physical and economic realities of its industry. As the world's largest construction and mining equipment manufacturer, its iconic brand and reputation for durability create formidable switching costs for customers. A mining operation cannot afford to replace its entire fleet of haul trucks and excavators with a new, unproven brand; the operational risk and downtime are simply too high. This loyalty is reinforced by massive economies of scale in manufacturing and a global service network that ensures uptime. The result is strong pricing power and stable profit margins, even during downturns. The company is not just selling machines; it is selling reliability and operational continuity. This moat is now being tested by powerful secular trends. The surge in data center construction, driven by artificial intelligence, has created a new demand for Caterpillar's reciprocating engines, which are used for backup power. The company is planning to double its output to meet this need. At the same time, global infrastructure investment, including the U.S. Infrastructure Investment and Jobs Act, provides a steady pipeline of demand for its construction equipment. This combination of a protected core business and a new, high-growth catalyst strengthens the long-term compounding story.

S&P Global's moat operates in the digital realm, built on network effects and the immense cost of changing systems. Its financial data and analytics platforms are the bedrock for countless market participants-from banks and asset managers to corporate treasuries. The value of these platforms increases as more users join, creating a powerful flywheel. More importantly, the switching costs are astronomical. A bank's risk models, credit ratings, and trading systems are deeply embedded in S&P's data feeds. Rewriting these systems to use a competitor's data would be a multi-year, multi-million dollar project fraught with operational risk. This creates a fortress of recurring revenue and pricing power. The company's ability to reinvest in its businesses, as noted in the evidence, further reinforces this advantage. The secular growth catalyst here is the relentless expansion of data and financial complexity. As global markets grow and regulations evolve, the demand for accurate, timely, and trusted data will only intensify. S&P Global is not just a vendor; it is an indispensable utility for the modern financial system.

Both companies are positioned at the intersection of durable moats and long-term growth catalysts. For the patient investor, their current prices may represent an opportunity to buy a piece of this durable economic engine at a fair value.

The One to Avoid: Home Depot

For the value investor, the checklist is not just about finding wide moats; it is about avoiding businesses where the moat is being eroded. Home Depot presents such a case. The company's business model is fundamentally tied to discretionary home improvement spending, a sector that is highly sensitive to the health of the housing market and consumer confidence. When those are weak, the results follow.

Evidence shows the pressure is real. The company's earnings have been languishing due to a sluggish housing market and consumer spending pressures. This is not a temporary blip but a reflection of a challenging macro environment where consumer sentiment remains low due to higher living costs and inflation. For a value investor, this is a red flag. It indicates that the company's core competitive advantage-its vast network of stores and supply chain-is being tested by a cyclical downturn, reducing its pricing power and compounding potential.

The market's verdict is clear. Despite the broader market's strength, . This decline is a direct response to investor concerns about its exposure to a potential economic slowdown. The stock's performance underscores the risk: when the cycle turns, Home Depot's revenue and profits are likely to fall more sharply than those of a business with a more defensive, essential-product moat.

Viewed through a value lens, this creates a problem of margin of safety. The stock's weakness suggests the market is pricing in a period of subdued growth and pressure on margins. For a disciplined investor, the opportunity cost of buying into this uncertainty is high. The business, while large and well-run, lacks the durable, pricing-power-driven moat of a wide-moat company. Its future cash flows are more cyclical and less predictable, offering less of a buffer against downside risk at current prices. In a year where the market's path is uncertain, avoiding this kind of challenged exposure is a prudent part of the checklist.

Catalysts, Risks, and the Value Investor's 2026 Outlook

The forward view for 2026 hinges on a patient investor's ability to separate enduring business fundamentals from the market's short-term noise. For the wide-moat buys, the primary catalyst is not a quarterly earnings beat, but the market's eventual recognition of their durable advantages. This process can take years, not quarters. The value investor's role is to identify these businesses early and buy them at a price that offers a margin of safety, then wait for the compounding to work.

For Caterpillar, the catalyst is the successful scaling of its new data center power engine business alongside its traditional construction and mining cycle. The company's plan to double its output is a direct response to a powerful secular trend. If it can execute, this creates a new, high-growth revenue stream that reinforces its core moat. The risk is an economic slowdown that dampens global infrastructure investment and mining activity, pressuring its traditional sales. Yet, its wide-moat characteristics-brand loyalty, scale, and service network-should provide a buffer. The company's strong balance sheet, a trait of wide-moat firms, gives it the financial flexibility to navigate any cyclical downturn.

S&P Global's catalyst is the relentless expansion of global financial complexity. As regulations evolve and markets grow, the demand for its trusted data and analytics platforms will only intensify. Its moat, built on network effects and astronomical switching costs, is designed to widen over time. The key risk is a misjudgment of the longevity of this competitive edge. Could a new technology platform or a regulatory shift disrupt its entrenched position? The company's ability to reinvest in its businesses, as noted in the evidence, is the best defense. The risk here is more about technological disruption than cyclical weakness.

The value investor's perspective for 2026 is one of disciplined patience. The checklist is clear: seek high-quality businesses with wide moats, buy them when the price offers a margin of safety, and then wait. The market's path will be uncertain, with volatility and sentiment swings a constant. But the principle remains constant. As the demonstrates, there are always high-quality stocks trading at cheap prices. The index's regular reconstitution ensures it stays focused on this opportunity. For the patient investor, 2026 is not about timing the market. It is about building a portfolio of durable economic engines, ready to compound value through whatever turbulence lies ahead.