Invest in an index fund that follows the price S&P500 historically it has proven to be a wonderful undertaking. In the past decade alone, the Vanguard S&P 500 ETF has increased at an annualized rate of 12.9%, including dividends.
But some individual investors aim to outperform the broader index. To do this, it is crucial to find companies that can deliver strong investment returns. However, I think it’s also important to ignore those who probably can’t.
If your ultimate goal is to beat the S&P 500, you’ll probably regret buying this Warren Buffett’s top stocks.
Weak returns
Investors who want to outperform the index should avoid buying stocks Coca-Cola (NYSE:KO). At the time of writing it is Berkshire Hathaway owns 9.3% of the beverage giant’s outstanding shares, worth $25 billion.
Despite the fact that Coca-Cola enjoys the confidence of the Buffett-led conglomerate, returns are poor. Over the past five and ten year periods, the stock has generated total returns of 43% and 106%, respectively. Over the past ten years, the S&P 500 has achieved a total return of 237%.
Of course, historical results will not necessarily resemble future returns. But when I talk about an established company like Coca-Cola, I think it’s safe to assume that investors will continue to lose in the market for years to come.
Quench the world’s thirst
Coca-Cola has clearly not been a successful investment in the recent past. However, there are still reasons to believe it is a high-quality company.
For starters, this is one of the strongest brands in the world, with a history spanning more than 100 years. By selling beloved beverages such as the soft drink Coca-Cola, as well as Dasani water and Minute Maid juice, the company has certainly developed customer loyalty. This contributes to its sustainability and relevance in the long term.
The company’s globally recognized brand sets it apart from the competition. It also allows Coca-Cola to increase prices for its drinks. In the first quarter of fiscal 2024 (ended March 29), the company posted a 3% net sales increase, mainly due to higher prices. That’s admirable, because it shows that Coca-Cola can handle it inflation headwinds.
Due to the strong brand that encourages customers to pay, this company is extremely profitable. Over the past decade, Coca-Cola’s gross margin and operating margin have averaged a stunning 60.5% and 26.4%, respectively.
Consistent profits have helped Coca-Cola increase its dividend for 62 consecutive years. With a flow dividend yield at 3.1%, it’s understandable that income-seeking investors are attracted to the shares.
Not a good setup for investors
As we’ve seen with the underperformance of Coca-Cola shares, a strong brand and high profitability aren’t enough to reward shareholders and their portfolios. And this will probably also be the case in the future. Therefore, investors should avoid buying stocks if they want to beat the S&P 500.
Coca-Cola has limited growth prospects. 2023 sales of $45.8 billion were actually lower than a decade earlier in 2013. The global soft drink market is extremely mature. In fact, this is an industry that is growing about 3% to 5% per year, which is in line with global gross domestic product (GDP) growth. This does not provide a robust backdrop for Coca-Cola to meaningfully grow its sales base.
As if the low growth potential wasn’t daunting enough, Coca-Cola shares trade at a price-to-earnings (P/E) ratio of 25.1. This represents a small discount to the previous five-year average, but it is a premium to the S&P 500. Investors are not presented with an attractive setup here.
While it may seem like a smart move to automatically follow in Buffett’s footsteps and own the same companies he does, especially one with a position as large as this one, the average investor should be a bit more discerning. That independent thinking will lead you to believe that Coca-Cola is a company best to avoid.
Should You Invest $1,000 in Coca-Cola Now?
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Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
Want to beat the S&P 500? You’ll regret buying these top Warren Buffett stocks, originally published by The Motley Fool
