Stocks for the Long Run: Watsco 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, Watsco (NYSE: WSO  ) .

Watsco shares have crushed the S&P 500 over the past quarter-century:

Source: S&P Capital IQ.

Since 1987, shares have returned an average of 17.7% 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 Watsco, it'd be worth $184,200.

Dividends accounted for a lot of those gains. Compounded since 1987, dividends have made up about half of Watsco's returns. For the S&P, dividends account for 39% of total returns.

Now have a look at how Watsco earnings compare with S&P 500 earnings:

Source: S&P Capital IQ.

Strong outperformance here, too. Since 1995, Watsco's earnings per share have grown by an average of 12.1% a year, compared with 6% a year for the broader index.

What's that meant for valuations? Watsco has traded for an average of 20 times earnings since 1987 -- below the 24 times earnings for the broader S&P 500.

Through it all, shares have been strong performers 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 Watsco with a five-star rating (out of five). Care to disagree? Leave your thoughts in the comment section below, or add Watsco to My Watchlist.

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