Better Buffett Stock: Constellation Brands vs. Coca-Cola

Warren Buffett plans to step down as the CEO of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) at the end of this year, but he's still making some big trades for the conglomerate's $285 billion portfolio. Last year, Buffett reduced Berkshire's stakes in several of his top stocks -- including Apple and Bank of America -- and boosted its cash and short-term U.S. Treasury holdings to record levels. Those cautious moves indicated that Buffett thought the market was getting overheated.

But as he pruned some of those long-term winners, he accumulated some new stocks and left his other top holdings alone. One of those new stocks was Constellation Brands (NYSE: STZ), one of the world's leading producers of alcoholic beverages. One of the classic stocks he didn't touch was Coca-Cola (NYSE: KO), the world's largest beverage maker.

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Berkshire Hathaway CEO Warren Buffett. Image source: Berkshire Hathaway.

Both of these stocks might seem like evergreen investments. But over the past 12 months, Constellation's stock declined 23% as Coca-Cola's shares rose 15%. Should you follow Buffett's lead and buy Constellation? Or should you simply stick with Coca-Cola?

Why did Constellation Brands lose its luster?

Buffett started a new position in Constellation by buying 5.62 million shares in the fourth quarter of 2024. He bought another 6.38 million shares in the first quarter of 2025. Those 12 million shares, which are worth $2.3 billion, account for 0.8% of Berkshire's entire portfolio.

The investment in Constellation turned heads because the company faces some formidable near-term and long-term challenges. It sells more than 100 brands of beers, spirits, and wines, but many of its top brands -- including the beers Modelo, Corona, and Pacifico -- are produced in Mexico and subject to the Trump administration's 25% tariffs against the country.

Even if Constellation overcomes those tariffs by shifting its supply chain or raising its prices, it still needs to deal with the ongoing decline of its cheaper wine brands and lower alcohol consumption rates among younger consumers. It's trying to address those issues by divesting its cheaper wine brands and rolling out lighter and nonalcoholic drinks for the younger generation, but the bears think it could eventually face an existential crisis like the big tobacco companies.

From fiscal 2025 (which ended this past February) to fiscal 2028, analysts expect revenue to decline from $10.2 billion to $9.9 billion as it divests some weaker brands. It posted a net loss in fiscal 2025, mainly due to some big goodwill impairment charges related to its struggling wine and spirits segment, but the company is expected to turn profitable again in fiscal 2026 as it laps those one-time expenses.

Analysts expect EPS to show a compound annual growth rate (CAGR) of 7% over the following two years as it tries to stabilize its business. The stock looks cheap at 15 times earnings and pays a decent forward yield of 2.1%, but it needs to resolve those pressing issues before it attracts a higher valuation.

Why is Coca-Cola still one of Buffett's top investments?

Buffett started to buy shares of Coca-Cola for Berkshire in 1988. It now owns 400 million shares, which are worth $28.8 billion and account for 10.1% of its portfolio. That makes it Berkshire's third largest position after Apple (21.8%) and American Express (15.7%).

Buffett's devotion to Coca-Cola, which he claims to drink five cans of daily, might seem risky as soda consumption rates decline worldwide. But over the past few decades, the company has diversified with more brands of bottled water, fruit juices, teas, sports drinks, energy drinks, coffee, and even alcoholic beverages to reduce its dependence on sugary sodas. It has also refreshed its classic sodas with new flavors, sugar-free versions, and smaller serving sizes to attract new customers.

Coca-Cola isn't heavily exposed to tariffs because it only sells the concentrates and syrups for its drinks. Its finished products are actually produced by a global network of bottlers that operate as independent companies.

Those bottlers might face a near-term headwind from the Trump administration's tariff on aluminum, but they can easily pivot toward more plastic bottles to offset that pressure. They also don't need to worry too much about the tariffs on exports into the U.S., since they produce and sell their finished beverages regionally.

From 2024 to 2027, analysts expect Coca-Cola's revenue and EPS to show a CAGR of 4% and 11%, respectively. The stock still looks reasonably valued at 25 times forward earnings, and it pays a forward yield of 2.8%. That's probably why Buffett hasn't sold any of his shares over the past 13 years.

The better buy: Coca-Cola

Constellation's business isn't headed off a cliff, but it faces much tougher near-term and long-term challenges than Coca-Cola. I see why Buffett thinks it's undervalued at these levels, but it could get stuck in the same trap as big tobacco companies and need to constantly hike prices to offset declining shipments, cut costs, and buy back more shares to squeeze out more earnings growth. So if I had to pick one of these stocks, I would stick with Coca-Cola instead of Constellation.

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Bank of America is an advertising partner of Motley Fool Money. American Express is an advertising partner of Motley Fool Money. Leo Sun has positions in Apple and Berkshire Hathaway. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.