Could Coca-Cola be a millionaire stock?

One of Warren Buffett’s biggest and longest holding investments is Coca cola (NYSE: KO). For some investors, knowing this Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) owning a stock is reason enough 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 beverage giant can make you a millionaire from this point, not how well it worked for Buffett’s Berkshire Hathaway. You’ll want to be careful what you pay for.

Coca-Cola needs no introduction

The Coca-Cola name is one of the most well-known and beloved commodity brands in the world. The company’s namesake soda is sold in both developed and emerging markets, supported by an incredible distribution system and the company’s impressive marketing team. But Coca-Cola is more than its namesake brand.

It operates in various juice categories, coffee, tea, sports drinks and orange juice, among other beverage areas. And given its massive scale — the company’s market cap is $290 billion — it has the clout to buy smaller and emerging brands to expand its product lineup. Simply put, Coca-Cola is a well-run company, which is why the stock has been a staple holding for Berkshire Hathaway for decades.

However, there is a small problem here if you look at Coca-Cola today, highlighted by the fact that Buffett’s Berkshire Hathaway has owned it for decades. As the following chart shows, Coca-Cola stock has risen dramatically over the years. Sure, it was a strong performance for Berkshire Hathaway and anyone else who bought it long ago, but is it a good buy today?

Coca-Cola is not cheap

Buffett was coached by renowned 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 was a big winner for Buffett says little about whether it will be a good investment for you, perhaps helping you reach millionaire status. That’s where you need to consider today’s rating.

Right now, Coca-Cola looks anything but cheap. The price-to-sales ratio, price-to-earnings ratio and price-to-book ratio are all above their five-year averages. The dividend yield is near its lowest level in a decade. Unfortunately, Coca-Cola seems completely overpriced right now.

That being said, Coca-Cola has suffered a number of major setbacks in its history. As the following chart highlights, drops of 20% to 50% are not uncommon. If you like the stock, you’ll want to keep it on your watch list, just in case there’s a big selloff that will lead to a lower valuation, which will give you a better chance of higher returns over time long. However, there are two things to keep in mind.

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There are market-related declines shown in this chart, such as the one that occurred around COVID and the Great Recession. These types of dips tend to be shorter, but will require you to buy when the market is in the middle of a crash. And then there are longer-term declines in Coca-Cola stock, when the stock is more affected by company-specific issues. Buying during a period of business weakness will also require a contrarian mindset, just of a different kind. The key is to focus on the strength of the brands and businesses that Coca-Cola owns.

Be ready, or you could miss

Coke seems expensive today. From these price levels, it will be harder to drive this stock to millionaire status. If you’re patient, though, there may be a more attractive entry point somewhere — but it will require nerves of steel to buy Coke stock when others are selling.

So don’t put Coke on your watch list and move on. Really know the company and make a plan to initiate a position when it’s cheaper — perhaps at a 20% discount, with plans to buy more if the stock falls further. If you don’t prepare ahead of time, you may look back and find that you missed out 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 stock? was originally published by The Motley Fool