Investing isn't easy. Even Warren Buffett counsels that most investors should invest in a low-cost index like the S&P 500. He says that way "you'll be buying into a wonderful industry, which in effect is all of American industry."
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, Cummins
Cummins shares have easily outperformed the S&P 500 over the last quarter-century, with most of the outperformance occurring in the last few years:
Source: S&P Capital IQ.
Since 1987, shares have returned an average of 12.7% 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 Cummins, it'd be worth $45,600.
Dividends accounted for a lot of those gains. Compounded since 1987, dividends have made up about half of Cummins' total returns. For the S&P, dividends account for 39% of total returns.
Now have a look at how Cummins earnings compare with S&P 500 earnings:
Source: S&P Capital IQ.
Strong outperformance here, too. Since 1995, Cummins earnings per share have increased by an average of 12.7% a year, compared with 6% a year for the broader index.
What's that meant for valuations? Cummins has traded for an average of 22 times earnings since 1987 -- just below the 24 times earnings of the broader S&P 500. It's far different today, however. Cummins currently trades for about nine times next year's expected earnings.
Through it all, shares have been strong performers 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 Cummins with a five-star rating (out of five). Care to disagree? Leave your thoughts in the comment section below, or add Cummins to My Watchlist.
Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Cummins. Motley Fool newsletter services have recommended buying shares of Cummins. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
More from The Motley Fool
Why Cummins, Veritone, and Sears Holdings Slumped Today
Find out why these stocks led the market lower.
Cummins Gets Its Energy Back
Find out how customers in the natural resources industry helped boost the engine-maker's results.
3 Stocks to Help You Make Money in Retirement
If you want your portfolio to last throughout your retirement, you need to invest in a way to protect your long-term purchasing power as well as your current costs of living. These three companies could very well play a solid role in that part of your portfolio.