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

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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, Gap (NYSE: GPS) .                                                               

Gap shares have easily outperformed the S&P 500 over the last quarter-century, albeit with more volatility:

Source: S&P Capital IQ.

Since 1987, shares have returned an average of 13.8% 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 Gap, it'd be worth $63,100. 

Dividends accounted for a lot of those gains. Compounded since 1987, dividends have made up about 20% of Gap's total returns. For the S&P, dividends account for 39% of total returns.

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

Source: S&P Capital IQ.

Decent outperformance here, too. Since 1995, Gap earnings per share have increased by an average of 9.4% a year, compared with 6% a year for the broader index. 

What's that meant for valuations? Gap has traded for an average of 23 times earnings since 1987 -- just below the 24 times earnings of the broader S&P 500. It's far different today, however. Gap currently trades for about 15 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 Gap with a two-star rating (out of five). Care to disagree? Leave your thoughts in the comments section below, or add Gap to My Watchlist.

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