Stocks for the Long Run: Western Digital vs. the S&P 500

Investing isn't easy. Even Warren Buffett counsels that most investors should invest in a low-cost index, like the S&P 500. That way, "you'll be buying into a wonderful industry, which in effect is all of American industry," he says.

But there are, of course, companies whose long-term fortunes differ substantially from the index. In this series, we look at how individual stocks have performed against the broad S&P 500.

Step on up, Western Digital (Nasdaq: WDC  ) .

Western Digital shares have underperformed the S&P 500 over the last quarter-century. By quite a bit, too:

Source: S&P Capital IQ.

Since 1987, shares have returned an average of 4.8% a year, compared with 9.7% a year for the S&P (both include dividends). That difference adds up fast. One thousand dollars invested in the S&P in 1987 would be worth $19,200 today. In Western Digital, it'd be worth just $4,500. 

Now, have a look at how Western Digital earnings compare with S&P 500 earnings:

Source: S&P Capital IQ.

Some outperformance here, albeit with much more volatility. Since 1995, Western Digital earnings per share have increased by an average of 10.3% a year, compared with 6% a year for the broader index.

What's that meant for valuations? Western Digital has traded for an average of 24 times earnings since 1987 -- about the same as the broader S&P 500. It's far different today, however. Western Digital currently trades for about five times next year's expected earnings.

Through it all, shares have been disappointing over the last quarter-century.

Of course, the important question is whether that will continue. That's where you come in. Our CAPS community currently ranks Western Digital with a four-star rating (out of five). Care to disagree? Leave your thoughts in the comment section below, or add Western Digital to My Watchlist

Motley Fool Staff has no positions in the stocks mentioned above. The Motley Fool owns shares of Western Digital. 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.


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