The Best Stock to Hold Forever
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Long term thinking is perhaps the most important characteristic of successful value investors. It's a big driver of superior returns and the right way to sleep soundly at night, knowing that your investments have been selected with regards to permanent considerations as opposed to transitory short-term factors. Trying to figure out what a stock will do in the following weeks or months is usually a loser’s game, but once you extend your timeframe to several years, things are not that complicated.
Even better, perhaps you should not think too much the timeframe at all and only buy those stocks which you would be willing to hold for really long periods of time, like forever. After all, it has done wonders for Warren Buffett, so it should work decently well for you by following the same principles.
A research paper published by Andrea Frazzini and David Kabiller finds some fascinating conclusions about Berkshire Hathaway´s performance over the last three decades. The authors find than Buffett´s company has a higher Sharpe ratio – a measure of returns adjusted by volatility – than any other stock or fund with more than 30 years in existence.
A dollar invested in Berkshire Hathaway in November 1976 would have been worth more than $1500 at the end of 2011. Over this time, Berkshire realized an average annual return of 19.0% in excess of the T-Bill rate, significantly outperforming the general stock market’s average excess return of 6.1%.
Berkshire stock also entailed more risk, realizing a volatility of 24.9%, higher than the market volatility of 15.8%. However, Berkshire’s excess return was high even relative to its risk, earning a Sharpe ratio of 19.0%/24.9% = 0.76, nearly twice the market’s Sharpe ratio of 0.39
To sum it up, in terms of risk adjusted returns Berkshire has achieved double the efficiency of the S&P 500, and a better performance than any other company or mutual fund with a track record of more than 3 decades. There are some important things we can learn from this mind blowing performance.
Buffett has done it by thinking long term and evaluating companies in regards to their competitive advantages as opposed to their short term expectations. In the words of the Oracle of Omaha: “Our favorite holding period is forever.” Keeping this in mind, it sounds reasonable to look for long term holdings among Berkshire´s portfolio, and its biggest position, Coca-Cola (NYSE: KO), certainly looks worthy of such consideration.
Coke is a paradigmatic example of a company which can be held forever. It´s not because of the taste of its products or its financial strength that Buffett started buying the stock in 1988; it’s the extraordinary value of the brand that made him fall in love with Coca-Cola.
The world leader in soft drinks has an irreplaceable and globally recognized brand. Actually it´s the most valuable brand in the world according to Interbrand. There is simply no way any competitor could build a brand strong enough to challenge Coke in the middle term; it takes decades of investment in marketing and brand management to achieve such a position. Coke has a privileged presence in consumer´s minds and hearts, which is a really fabulous asset.
Coca-Cola has displaced archrival PepsiCo (NYSE: PEP) from the second place in the US carbonated drinks markets a couple of years ago, as Diet Coke overtook Pepsi in a very symbolic victory for Coke. In spite of its gigantic size, Coke keeps outperforming the competition like if it was the new player in the market.
When comparing Coke to competitors like Pepsi or Dr Pepper Snapple Group (NYSE: DPS), the company excels in terms of profitability as we can see from its Return on Assets or Operating Margin, and also in growth over the last few years, both when looking at sales and earnings per share. Growing faster than the competition is not something very usual for the biggest company in its sector, but again, there is nothing ordinary about Coca-Cola.
Valuation wise, Coke is trading at reasonable levels, with both its P/E ratio and dividend yield near their five year averages of 19 and 2.7% respectively. These metrics are also in line with those of competitors like Pepsi and Dr Pepper, in spite of the fact that Coke has superior fundamentals. Current valuation levels don´t look like a complete bargain, but they are certainly not excessive either.
The company will need to adapt to changing consumer habits, as many customers in the US and Europe are trying to avoid soft drinks due to concerns about their health impact. Other trends like growing demand for energy drinks among the young show that the drinks market is dynamic and subject to disruption from changing consumer tastes.
But Coke has been replacing carbonated drinks with sports drinks, waters and other healthy alternatives. Just remember we are not talking about a soda company here; this is a marketing machine with a tremendous brand power and an enormous distribution network, so none of these changes will jeopardize the company´s future.
Always Coca-Cola is one famous slogan, and a memorable marketing campaign among the many which have left undeletable memories in the minds and hearts of people around the planet. Thinking about the strength of its brand, and its remarkable marketing power, the version for investors should probably say: Coca-Cola to hold forever.
acardenal owns shares of Berkshire Hathway. The Motley Fool owns shares of The Coca-Cola Company and PepsiCo. Motley Fool newsletter services recommend PepsiCo and The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.