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, Alcoa (NYSE: AA ) .
Alcoa shares have underperformed the S&P 500 over the past quarter-century:
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). One thousand dollars invested in the S&P in 1987 would be worth $19,200 today. In Alcoa, it'd be worth just $4,500.
Dividends accounted for a lot of those gains. Compounded since 1987, dividends have made up about half of Alcoa's total returns. For the S&P, dividends account for 39% of total returns.
Now have a look at how Alcoa earnings compare with S&P 500 earnings:
Source: S&P Capital IQ.
Deep underperformance here, too. Since 1995, Alcoa's earnings per share have declined by an average of 3.3% a year, compared with 6% a year growth for the broader index.
What's that meant for valuations? Alcoa has traded for an average of 30 times earnings since 1987 -- above the 24 times earnings for the broader S&P 500. It's far different today, however. Alcoa shares currently trade for about 13 times next year's expected earnings.
Through it all, shares have been disappointments over the past quarter-century.
Of course, the important question is whether that will continue. That's where you come in. Our CAPS community currently ranks Alcoa with a four-star rating (out of five). Care to disagree? Leave your thoughts in the comment section below, or add Alcoa to My Watchlist.
More Expert Advice from The Motley Fool
Materials industries are traditionally known for their high barriers to entry, and the aluminum industry is no exception. Representing 14.7% of 2011 global production in this highly consolidated industry, Alcoa is in prime position to take advantage of growth that some expect will lead to total industry revenue approaching $160B by 2017. Based on this prospective and several other company-specific factors, Alcoa is certainly worth a closer look
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