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Warren Buffett is the largest shareholder of the biggest soft drink company in the world. His Berkshire Hathaway (NYSE: BRK-B) owns over 9% of Coca-Cola (NYSE: KO), but he might be losing his touch of late.
Shares of Coca-Cola have underperformed the S&P 500 for over five years now. The lone bright spot remains its 3% dividend yield.
But part of the reason Buffett is still involved with Coca-Cola is that he invested way back in 1988. He’s up hundreds of percentage points on his cost basis, and selling shares today would trigger a sizable tax bill.
Instead, Buffett is content to collect the $140 million quarterly dividend check he’s getting from Coca-Cola. However, that doesn’t mean the typical investor should be complacent.
Why Buffett Is Wrong on Soda
The days of big soda ruling the supermarket and convenience store shelves are over. The majority of time, I don’t even find myself in a soda aisle when shopping. Many people are in a similar situation. Soda demand fell for the 11th straight year in 2015.
In fact, the annual per-capita consumption of soft drinks is down to the lowest level since 1985. This comes as smaller beverage companies continue to take market share with healthier alternatives. Big soda makers like Coca-Cola and PepsiCo (NYSE: KO) could easily underperform for another half decade.
Coca-Cola’s answer so far has been to make strategic investments in faster-growing companies, such as Monster Corp. (NASDAQ: MSNT) and Keurig Green Mountain. However, it hasn’t been enough.
Beer Is the New Soda
Soda appears to be a drink of the past. Today, it’s all about beer and water. What’s interesting is that one company is looking to tap both of those markets. SodaStream (NASDAQ: SODA), known for its at-home soda machines, is now planning to tap into the home-brew beer market.
SodaStream announced last week that it’s rolling out a machine that allows users to brew beer at home. And who could blame them? The new Beer Bar system that SodaStream is introducing will allow users to create a 4.5% alcohol by volume beer in seconds using carbonated water and beer concentrate.
Beer is big business these days. The rise of microbreweries and popularity of craft beers have helped jumpstart consumer interest in beer over the last few years.
It has been speculated that Coca-Cola and Anheuser-Busch InBev (NYSE:BUD) could merge, which would help diversity Buffett’s favorite soda company. But by rolling out a beer machine, SodaStream helps diversify itself almost immediately.
SodaStream shares have been on a tear over the last few months. The stock is up 50% in just the last month and is now up 33% for the year. This comes as SodaStream saw a 10.4% boost in quarterly sales last quarter thanks to the push it’s making into the carbonated water market.
As well, one of its major competitors is now out of the market. Keurig Green Mountain, which was recently bought out by JAB Holding Co., decided to pull the plug on its Keurig Kold at-home cold beverage system.
So, to answer the question: Is there still money in soda? There is if you’re targeting the right markets.
The Best Beverage Bet
So, what is the best beverage play? You have gross underperformers like Coca-Cola or expensive but growing companies like National Beverage Corp. (NASDAQ: FIZZ) to choose from.
But in truth, SodaStream is cheaper than either Coca-Cola or PepsiCo from a valuation perspective. And it’s also expected to grow earnings at a rate that dwarfs both companies over the next five years.
One of the big issues is that SodaStream’s image has been inherently tied to the soda market, with most investors considering it a play on making soda at home. However, the majority of consumers actually use it to make unflavored or naturally flavored carbonated water.
SodaStream operates a razor-razorblade model, which was made popular by safety-razor company Gillette decades ago. The idea is that you sell a core product at break-even cost – be it a razorblade handle or a SodaStream machine – and then make your money with a higher-margin “refillable” product.
Thus, razor companies make their money on razorblades, something that wears out and needs to be replaced. Likewise, SodaStream makes its money on refills of its CO2 containers. So the more SodaStream machines in households – whether they’re used for soda, beer or carbonated water – the better it is for the company.
If you’re looking for an underrated small-cap stock to add to your portfolio to tap into the shift away from soda toward water and beer, SodaStream is worth a look.
This Is Making Ordinary People Rich
Ordinary people across America are getting insanely rich. Take Gladys Holm. She never earned more than $15,000 a year as a secretary. But by making one simple move, she was able to leave an $18 million fortune to a children’s hospital when she died. There’s many more just like her.