One of Warren Buffett's largest and longest held investments is Coca-Cola (NYSE: KO). For some investors, knowing that Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) owns a stock is enough reason to buy it. But there's a major caveat here, because Buffett has owned Coca-Cola for a long time. So the question today is whether the drink giant can make you a millionaire from this point, not how well it has performed for Buffett's Berkshire Hathaway. You'll want to be careful about what you pay.
Coca-Cola needs no introduction
The Coca-Cola name is one of the world's best-known and loved consumer staples brands. The company's namesake soda is sold in both developed markets and emerging ones, backed by an incredible distribution system and the company's impressive marketing team. But Coca-Cola is more than just its namesake brand.
It operates in various soda categories, coffee, tea, sports drinks, and orange juice, among other beverage areas. And given its massive scale -- the company's market cap is a huge $290 billion -- it has the heft needed to buy smaller, up-and-coming brands to expand its product lineup. Simply put, Coca-Cola is a well-run company, which is the reason the stock has been a core holding for Berkshire Hathaway for decades.
Yet there's one small problem here if you're looking at Coca-Cola today, highlighted by the fact that Buffett's Berkshire Hathaway has owned it for decades. As the following chart highlights, Coca-Cola's stock has risen dramatically over the years. Sure, it has been a strong performer for Berkshire Hathaway and anyone else who bought it a long time ago, but is it a good buy today?
Coca-Cola isn't cheap
Buffett was trained by famed value investor Benjamin Graham. To paraphrase one of Graham's most important sayings, even a good company can be a bad investment if you pay too much for it. That Coca-Cola has been a big winner for Buffett says little about whether it will be a good investment for you, perhaps helping you to reach millionaire status. That's where you have to consider today's valuation.
Right now, Coca-Cola looks anything but cheap. Its price-to-sales ratio, price-to-earnings ratio, and price-to-book value ratios are all above their five-year averages. The dividend yield is near its lowest levels over the past decade. Unfortunately, Coca-Cola looks fully priced to expensive right now.
That said, Coca-Cola has experienced a number of large drawdowns in its history. As the following chart highlights, 20% to 50% declines aren't uncommon. If you like the stock, you'll want to keep it on your watchlist, just in case there's a big sell-off leading to a lower valuation that will give you a better chance of higher long-term returns. Still, there are two things to keep in mind.
There are market-related drops on display in that chart, such as the one that took place around COVID and the Great Recession. Those types of declines tend to be shorter, but they will require you to buy when the market is in the middle of a nosedive. And then there are longer-term declines in Coca-Cola's stock, when the shares are affected more by company-specific issues. Buying during a period of business weakness, too, will require a contrarian mindset, just of a different nature. The key is to focus on the strength of the brands and businesses that Coca-Cola owns.
Be ready, or you could miss out
Coca-Cola looks expensive today. From these price levels, it will be harder to ride this stock to millionaire status. If you're patient, however, there's likely to be a more attractive entry point somewhere -- but it will require you to have nerves of steel so you can buy Coke stock when others are selling.
So don't just put Coca-Cola on your watchlist and move on. Really get to know the company and make a plan to initiate a position when it's cheaper -- perhaps on a 20% drawdown, with plans to buy more if the shares go even lower. If you don't get ready ahead of time, you might look back and find you missed a chance to get in on a great company while it was temporarily out of favor.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
Could Coca-Cola Be a Millionaire-Maker Stock? was originally published by The Motley Fool