Three Stocks to Buy to Beat Warren Buffett's Gains

While many look to Warren Buffett's holdings to find the best stocks to buy, it turns out his holdings' rivals could be the better picks.

Buffett is known not only for value investing, but also buying shares only of companies that operate in prosaic, easy-to-understand businesses. That's why the holdings of Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) are spectacular.

But in this look at how to find more stocks to buy that deliver - and even beat - the gains of Buffett's most popular holdings, some of the best bets could be companies that share a market with Berkshire's big winners.

Take a look.

Stocks to Buy to Beat Buffett: Coke vs. Pepsi

One of Buffett's most widely known positions is his 400 million-share stake in The Coca Cola Co. (NYSE: KO), the world's largest soft drink maker.

Berkshire is by far the largest shareholder of Coke. The firm's position in the Dow component was more than twice the size of second-largest holder Vanguard's position at the end of the last year.

It is hard to argue with the returns Coke has delivered for Berkshire and other investors.

Over the past two decades, shares of Coca-Cola have returned an astounding 282%. The company raises its dividend like clockwork and has a dividend increase streak that dates back decades. Since 2001, Coke's payout has more than tripled.

Believe it or not, in terms of total returns, PepsiCo Inc. (NYSE: PEP) has been better over the past 20 years. Shares of Coke's primary rival have returned nearly 330%. Pepsi, a prodigious dividend raiser in its own right, has nearly quadrupled its payout since 2001.

There are small time frames when Coke outpaces Pepsi and vice versa. For example, shares of Coke have been better over the past five years, but Pepsi has easily outpaced its rival in the past year.

Plus, at 16.6 times forward earnings, shares of Pepsi trade at a slightly more attractive valuation than shares of Coke.

That could be a sign that ordinary investors have a chance to trump the Oracle of Omaha over the next few years, at least when it comes soft drink stocks.

Best Stocks to Buy in Consumer Staples

Another one of Berkshire's more recognizable holdings is The Procter & Gamble Co. (NYSE: PG), the world's largest consumer products company.

Berkshire held over 52.7 million shares of P&G at the end of last year, though the company has been reducing its position in the Tide detergent maker.

As is the case with Coke, Buffett's had huge success with P&G. The stock has a dividend increase that dates back over five decades, one of the longest in the United States. The dividend has more than tripled since early 2001, and shares of P&G have surged almost 520% in the past 20 years.

But, if an investor bought shares of rival Colgate-Palmolive Co. (NYSE: CL) 20 years ago, he or she would today be sitting on an investment that outpaced Buffett's P&G stake by nearly 300%. Colgate is also a "like clockwork" dividend raiser and has nearly quadrupled its payout since early 2001.

Importantly, investors did not need to make a 20-year commitment to Colgate-Palmolive to get better returns than what Buffett has gotten from P&G. Over the past five years, Colgate-Palmolive is up nearly 53% compared to less than 20% for P&G.

A Better Way to Buy Pharma

As of the end of last year, there were three big-name pharmaceuticals stocks in the Berkshire portfolio: GlaxoSmithKline Plc (NYSE ADR: GSK), Sanofi SA (NYSE ADR: SNY) and Dow component Johnson & Johnson (NYSE: JNJ).

In the case of J&J, it should be noted that Buffett has slashed this position. Back in 2007, Berkshire owned about 61 million shares of the blue-chip pharmaceuticals names. By the end of 2012, that number was closer to 400,000 shares.

Over the past five years, the aforementioned trio of stocks has returned an average of 24%. J&J is like P&G and Coke in that it has a seemingly eternal dividend increase streak. Since early 2011, the company has increased its dividend by 3.5 times.

Obviously, owning three stocks from the same sector is not practical for some capital-constrained investors, but once again it is possible to beat Buffett on the pharma front. The objective was easily accomplished with an ETF, the iShares Dow Jones U.S. Pharmaceuticals Index Fund (NYSE: IHE).

IHE has nearly doubled in value over the past five years, meaning it has performed far better than J&J, the ETF's largest holding. Home to 37 stocks, like other blue-chip pharmaceuticals names such as Pfizer Inc. (NYSE: PFE), Merck & Co. Inc. (NYSE: MRK) and Abbott Laboratories (NYSE: ABT), IHE represents a credible way for investors to get exposure to a broad swath of drug stocks.

But as Buffett knows, one huge reason to add J&J to your portfolio, as well: IHE yields just 1.75%, well below J&J's dividend yield.

For more of the best investments to mirror Buffett's investing success, check out these stocks to buy: 5 Picks Buffett and Insiders Love Right Now