It’s hard to argue with the S&P500‘S (SNPINDEX: ^GSPC) historical achievements. Over the past twenty years, the broad index has delivered a total return of 610%, for an annual average of 10.3%. If you’re someone who likes to pick individual stocks, I assume the goal is to outperform the S&P 500 over the long term.
A good place to look for investment ideas could be Berkshire Hathaway‘s portfolio. The Oracle of Omaha’s conglomerate owns dozens of shares. But to be clear, not all of them need to be bought, especially if you want to beat the S&P 500.
In fact, history says you should avoid this top Buffett stock if outperformance is the ultimate goal.
The thirst of growth investors is not quenched
Investors who want to earn huge returns should not buy stocks Coca-Cola (NYSE: KO). The global beverage giant currently makes up 6.8% of Berkshire’s portfolio, trailing just one Apple, bank of AmericaAnd American Express. Over the past five- and 10-year periods, the stock has delivered total returns, including dividends, that have significantly lagged the S&P 500.
That track record suggests that Coca-Cola is a mature company operating in an industry that won’t grow much better than the rise of the global economy. gross domestic product (GDP).
That’s because non-alcoholic ready-to-drink drinks are not consumed in larger quantities per person, especially in the US. And Coca-Cola already sells its products in more than 200 countries and territories, so there isn’t really any more room to further penetrate new markets.
Coca-Cola’s sales in 2023 were even slightly lower than what the company reported ten years earlier in 2013. Ultimately, net profit rose 2.2% year over year, with the help of some operating leverage. It’s no wonder the stock is a notable underperformer. If sales and earnings had grown at a higher clip, I’m almost certain the stock would have done much better.
The valuation also looks expensive. Trading at one price-earnings ratio At 25.3, the stock goes for a premium compared to the S&P 500. That doesn’t seem to be the case to me, especially when you realize that you would have been better off recently just investing in the broader index.
A quality company
Coca-Cola may not have the potential to generate strong investment returns in the future. But to be clear, the company is still a high-quality business for three obvious reasons. I’m sure Buffett is familiar with these points.
The company has one of the most powerful brands in the world. This not only results in customer loyalty; it helps management increase its pricing power. In fact, the brand differentiates Coca-Cola from the large number of competing products on the market.
Unlike many companies, especially in the technology sector, Coca-Cola operates in an industry that does not invite much disruption and innovation. And that’s a good thing. It means there is minimal chance that Coca-Cola will become irrelevant soon. In other words, the company has sustainability. Almost without a doubt it will be in 50 years.
I also point to the company’s ability to consistently generate operating income and free cash flow regardless of the economic cycle. Stable earnings have allowed Coca-Cola to increase its dividend for 62 consecutive years.
So while Coca-Cola may not meet the demands of investors looking to generate outsized returns, the stock may catch the attention of those who prioritize a passive income stream.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Apple, Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Want to beat the S&P 500? History Says You Should Avoid This Top Warren Buffett Stock was originally published by The Motley Fool
