Taking a look inside someone else's portfolio, you're likely to find stocks that you think are good choices as well as stocks you could never envision yourself owning. That notion even holds true when examining the portfolio of a famed investor like Warren Buffett, who manages the holding company Berkshire Hathaway (BRK.A 0.64%) (BRK.B 0.54%).
A look at Berkshire's portfolio reveals at least two stocks -- Visa (V -0.48%) and Snowflake (SNOW -0.26%) -- that I think are great buys because of their long-term tailwinds. It also reveals a stock Berkshire has owned since 1988 that I'd avoid -- Coca-Cola (KO 0.68%) -- because it has underperformed over the past decade.
Let's take a closer look at why Visa and Snowflake are better Buffett buys than Coca-Cola.
Visa and Snowflake are growing faster
This trio of companies operates in three entirely different industries. Chances are high that you have a Visa credit or debit card and have partaken of a beverage made by Coca-Cola. Chances are low that you have ever used Snowflake's product.
Snowflake's software provides businesses with the tools they need to manage a data cloud, including storage, data engineering, and utilizing that data to feed applications. Todd Combs and Ted Weschler (two of Buffett's lieutenants in Berkshire Hathaway) are likely responsible for initiating this investment, as Buffett has generally stayed away from big bets on tech stocks. Still, with nearly $1 billion of Berkshire's money tied up in Snowflake, Buffett likely has some involvement in adding it to the portfolio.
So what makes Visa and Snowflake better investments than Coca-Cola? Market opportunity.
Coca-Cola has already captured most of its market, so there isn't much room left for growth other than through acquisition. Since 2005, Coca-Cola's revenue has only grown by 94% (about 5.2% a year on average). For comparison, Visa's revenue is up 173% in the past decade, and Snowflake's is up 362% since it went public in late 2020. You'd actually have to go back to the first quarter of 1990 to see Coca-Cola deliver the same revenue growth Snowflake has generated in just two and a half years.
This dichotomy between slow and fast revenue growth is expected to continue into 2023. Here are analysts' average projections for each company's growth next fiscal year:
- Coca-Cola: 2.9%
- Visa: 11.9%
- Snowflake: 46.4%
Coca-Cola has reached a point where growth will be harder to come by, which makes me more bullish on the other two. Still, there's at least one reason you might consider adding it to your portfolio instead of Visa or Snowflake.
Coca-Cola has long underperformed the market
Growth isn't everything investors look for; some prefer stability and a nice dividend. While Snowflake is a young company and doesn't yet pay a dividend, Visa does. However, Visa's current yield of 0.9% is dwarfed by Coca-Cola's 2.8%, making Coca-Cola the better dividend stock. Additionally, Coca-Cola outperformed the other two in 2022, based on their stock-price changes that year:
Data by YCharts.
However, stability and dividends have their cost, which is reflected in the 10-year total returns of Coca-Cola and Visa:
Total Return Level data by YCharts
Not only did Coca-Cola get trounced by Visa, but it also lost substantially to the broader market, even with dividends added in. Moreover, it's unlikely Coca-Cola will discover new growth verticals, so this underperformance is likely to continue.
For what it's worth, Snowflake's stock price is down about 46% from its initial public offering price, primarily due to its high valuation and the exodus from tech stocks by investors in 2022.
Meanwhile, Visa and Coca-Cola are almost valued the same, with price-to-earnings ratios of 29.7 and 27.9, respectively. Coca-Cola is growing more slowly than Visa and has a worse profit margin (23% versus 51%), but is valued at around the same level as Visa. Its history, and the fact that Buffett's company owns it, likely have a lot to do with that.
At a price-to-sales (P/S) ratio of 24, Snowflake isn't cheap either, but its growth rate allows it to command a significant premium. Plus, Snowflake's valuation has come down from the P/S of over 100 it used to trade at.
While there are a few companies that many investors point to as Buffett stocks, it's worth considering the ones he's bought that aren't usually given this tag. Visa and Snowflake are rapidly growing companies with a bright future ahead. Coca-Cola is a fantastic company, but the potential for outsized returns isn't there. If you're early on in your investing career, you might want to steer clear of Coca-Cola and instead investigate stocks like Visa and Snowflake.
