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It's hard to argue with the S&P 500's (SNPINDEX: ^GSPC) historical performance. In the past 20 years, the broad index has produced a total return of 610%, translating to an annual average of 10.3%. If you're someone who likes to pick individual stocks, then I'd assume the goal is to try to outperform the S&P 500 over the long term.
A good place to look for investment ideas might be Berkshire Hathaway's portfolio. The Oracle of Omaha's conglomerate owns dozens of stocks. But to be clear, not all of them should be purchased, 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 objective.
Not quenching growth investors' thirst
Investors looking to score huge returns should not buy shares of Coca-Cola (NYSE: KO). The global beverage giant currently makes up 6.8% of Berkshire's portfolio, behind only Apple, Bank of America, and American Express. In the past five- and 10-year periods, the stock produced a total return, including dividends, that has significantly lagged the S&P 500.
That track record points to the fact that Coca-Cola is a mature business that operates in an industry that won't register growth that much better than the rise of global gross domestic product (GDP).
That's because non-alcoholic ready-to-drink beverages aren't being consumed in larger quantities on a per-person basis, especially in the U.S. And Coca-Cola already sells its products in more than 200 countries and territories, so there isn't really more room to further penetrate new markets.
Coca-Cola's revenue in 2023 was actually slightly lower than what the business reported 10 years before in 2013. On the bottom line, net income rose at a 2.2% annualized pace, thanks to the help of some operating leverage. It's no wonder the shares have been a notable underperformer. If sales and earnings increased at a higher clip, I'm almost positive the stock would have done much better.
The valuation also looks expensive. Trading at a price-to-earnings ratio of 25.3, the stock goes for a premium relative to the S&P 500. That seems off to me, particularly when you realize that you'd have been better off just investing in the broader index in recent times.
A quality business
Coca-Cola might not have the potential to put up strong investment returns going forward. But to be clear, the company is still a high-quality enterprise for three very obvious reasons. I'm sure Buffett is familiar with these points.