Warren Buffett and his company Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%) made some excellent investments over the years. One of those famed investments is Coca-Cola (KO 0.15%), which he first purchased shares of in 1988. By 1994, Buffett had acquired all the Coca-Cola shares he owns today.
However, he hasn't purchased any since then. So, despite what many faithful Buffett followers may say, I think Coca-Cola isn't a great purchase for investors now. While this may be a controversial opinion, there are a lot of reasons that back up this line of thought.
Coca-Cola has not beaten the market as of late
From 1995 on, few investors understand that Coca-Cola underperformed the broader market (I'm using the S&P 500 as the comparison) by a significant margin.
KO Total Return Level data by YCharts
However, Coca-Cola has outperformed the S&P 500 going back to Berkshire's original investment.
KO Total Return Level data by YCharts
Total return includes reinvested dividends, although Buffett doesn't reinvest his Coca-Cola dividends back into the stock, so the underperformance is actually worse than these charts represent. Furthermore, the broader market outperformance has been increasingly evident in the past few years, with the S&P 500 returning about 229% this past decade versus Coca-Cola's 140%.
While this is a counter-narrative argument, it's hard to argue against the raw data. In fact, Buffett himself is a huge proponent of just investing in the S&P 500. So why has Coca-Cola underperformed so severely?
Coca-Cola's stock isn't for everyone
Much of Coca-Cola's underperformance deals with valuation. Except for an artificially low period around 2012, Coca-Cola's price-to-earnings ratio usually trades at a massive premium to the stock market.
KO PE Ratio data by YCharts
Buffett is a notorious value investor, and valuation is likely a primary reason he hasn't bought any more Coca-Cola stock. At 28.0 times its current earnings, Coca-Cola is more expensive than Alphabet (17.5 times earnings) or Apple (21.3 times earnings).
Following Warren Buffett's principles and purchasing Coca-Cola stock currently stand in direct opposition with each other. So am I saying to dump the stock and get out?
Maybe. Coca-Cola grew its revenue by 10% last quarter and increased its earnings per share by 14%. Compared to many companies dealing with slowing sales and rising costs, Coca-Cola is resisting these changes.
Coca-Cola is a solid business -- which is why Buffett owns the stock. However, analysts don't expect this growth to continue, as they project $2.53 and $2.71 in EPS for 2023 and 2024, respectively. This indicates 2% and 7% growth over the previous year, which are both market-underperforming numbers.
The long-term track record (I'm talking about the last 25 years) isn't great for Coca-Cola. Although it's a well-managed business, it hasn't experienced the same level of growth as the broader market. I don't think Coca-Cola will stumble upon the next growth phase to propel into market-beating territory, so it doesn't make sense to own the stock.
However, if you're looking for a steady stock that isn't going to lose much value (Coca-Cola is up 8% versus the S&P 500, which is down 20% this year), Coca-Cola isn't a bad stock to own. But, most investors (especially those not in retirement) should be focused on growth, so Coca-Cola likely isn't the best Buffett pick for you.
Although many Buffett devotees love Coca-Cola stock, it may be better to follow another piece of advice and invest in an S&P 500 index fund.
