2 Magnificent Dow Stocks You Can Confidently Buy in February, and 1 to Avoid

For more than 128 years, the iconic Dow Jones Industrial Average (DJINDICES: ^DJI) has served as Wall Street's "health" barometer. Though it began as an industrial stock-dominated index with 12 members in May 1896, it's comprised of 30 highly diverse, multinational companies today.

While all 30 of the Dow's components share similar traits, such as being time-tested and possessing well-defined competitive advantages, the outlook for these predominantly brand-name businesses differs greatly.

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As we push ahead into the shortest month of the year, two magnificent Dow stocks stand out for all the right reasons and can be purchased with confidence by investors, while another is contending with mounting headwinds.

Dow stock No. 1 that can be purchased with confidence in February: Verizon Communications

With most of Wall Street focused on high-growth tech stocks and anything having to do with artificial intelligence (AI), the best value in the Dow in February might just be stalwart telecom giant Verizon Communications (NYSE: VZ).

While Wall Street's bull market has been stretching its legs for more than two years, Verizon stock has tumbled by 26% over the trailing-three-year period (not including dividends). This gross underperformance likely has to do with the Federal Reserve's aggressive rate-hiking cycle that began in March 2022. Companies that carry a lot of debt on their balance sheet, such as large telecoms, may see their debt-servicing costs rise and financial flexibility narrow as rates climb.

But what investors might be overlooking is that Verizon's balance sheet has been steadily improving in recent years. When 2022 came to a close, the company was lugging around more than $130 billion in unsecured debt and had an unsecured debt-to-adjusted-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of 2.7. As of the close of 2024, its unsecured debt had fallen below $118 billion and its unsecured debt-to-adjusted-EBITDA ratio is now 2.3. Verizon's financial flexibility is improving, and its nearly 7% dividend yield isn't going anywhere.

Ongoing investments to expand the reach of its 5G wireless service are also paying off. Wireless service revenue has grown for 18 consecutive quarters, with Verizon's strong pricing power playing a key role.

But the unsung hero for Verizon might just be its broadband segment. Even though broadband isn't the high-growth story it was when this century began, it's a steady generator of operating cash flow and can entice users to bundle their services. Verizon's total broadband connections jumped 15% in 2024 to north of 12.3 million.

Lastly, Verizon's valuation makes it a no-brainer buy in February. Amid a historically pricey stock market, investors can scoop up shares of Verizon for only 8 times forecast earnings per share (EPS) in 2026.

Image source: Coca-Cola.

Dow stock No. 2 to can be bought with confidence in February: Coca-Cola

The second Dow Jones Industrial Average stock that can be purchased with confidence this month is none other than consumer staples colossus Coca-Cola (NYSE: KO).

Although Coca-Cola shareholders have seen their investment climb in value by 4% over the trailing-two-year period, this gain pales in comparison to the Dow's 36% return over the same time frame. This underperformance can be explained by Coke being a mature, slower-growing company that's taken a back seat to high-flying AI and cloud-computing stocks.

However, with the S&P 500's Shiller price-to-earnings (P/E) Ratio hitting its third-highest level (nearly 39) during a bull market, when back-tested 154 years, historically inexpensive and time-tested consumer staple stocks like Coca-Cola could have their moment to shine.

What Coca-Cola brings to the table for their shareholders is consistency. It has ongoing operations in every country except North Korea, Cuba, and Russia, and has been the most-chosen brand from retail shelves for 12 consecutive years, based on the annual "Brand Footprint" study from Kantar. Coca-Cola is finding ways to move the organic growth needle in emerging markets while allowing its exceptional pricing power to do the heavy lifting in developed countries.

Top-tier marketing is another reason Coca-Cola has been such a rock-solid investment spanning multiple decades. It's relying on digital channels and AI to tailor messages for younger audiences, and is leaning on its rich history and brand-name ambassadors to cross generational gaps and engage with more mature consumers. The company's 62-year (and counting) streak of consecutive dividend increases makes clear that this marketing strategy is working.

To round things out, Coca-Cola stock is a relative bargain. Its forward P/E ratio of 21.4 represents an 8% discount to its average forward P/E multiple over the last half-decade.

The Dow stock investors would be smart to avoid in February: Nvidia

On the other end of the spectrum, the one Dow component investors would be wise to steer clear of in February is one of the newest additions to this ageless index, Nvidia (NASDAQ: NVDA).

Investors don't have to dig too deeply to understand why Nvidia gained more than $3 trillion in market value in less than two years. The company's Hopper (H100) graphics processing units (GPUs) and next-generation Blackwell GPU architecture are the brains powering enterprise AI-data centers, fueling generative AI solutions, and facilitating the training of large language models (LLMs).

While Nvidia has unquestionably benefited from AI-GPU scarcity and overwhelming demand for its AI hardware, there are reasons to believe its parabolic climb won't be sustainable.

The eye-popping decline AI stocks experienced on Jan. 27, shortly after DeepSeek's open-source LLM chatbot made its debut, provides a perfect example of the fragility of Nvidia's ascent. The potential for DeepSeek to develop and train a capable chatbot that uses less-powerful Nvidia chips is a needed reminder to the investment community that most businesses have yet to optimize their AI solutions and lack a well-defined game plan of how they'll do so. Every next-big-thing innovation for three decades has needed time to mature, and artificial intelligence is unlikely to be the exception.

Competition poses a serious threat to Nvidia, as well. Although most investors are focusing on direct external competitors, the biggest concern for Nvidia is that many of its top customers by net sales are internally developing AI chips of their own. Even if these GPUs are slower than the Hopper and Blackwell, they'll be considerably cheaper and more readily accessible. In short, this internal competition can cost Nvidia valuable data center real estate, and will almost certainly remove the AI-GPU scarcity that's fueled its pricing power and boosted its gross margin.

The regulatory environment isn't helping Nvidia out, either. The Biden administration restricted exports of high-powered AI chips and AI-related equipment for three consecutive years. Meanwhile, Donald Trump's return to the White House begins with tariffs for China, the threat of tariffs on foreign chipmakers, and a protectionist approach to AI technology.

Finally, Nvidia's valuation is a concern. Its stock topped a price-to-sales multiple of more than 40 last summer, which is consistent with a level that prior bubbles have burst.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.