Is DeVry a good short-term trade?

— -- Q: Do you think DeVry is a good stock to buy and do you feel it will rise for a short-term trade?

The company is a large player in the for-profit education industry. For years, especially during the 1990s, for-profit education stocks were giant leaders. These companies were beneficiaries of lenient lending practices from the U.S. government. Students could pay the for-profit schools their tuition fees largely using federal loans.

But over the past few years, the easy loans to students skidded. Regulators have become very concerned about the hefty debt loads many of these students face upon graduation, relative to the salaries they receive. The entire industry has been under pressure as a result. Shares of DeVry have fallen from more than $65 a share in July to roughly $39 a share now.

DeVry, along with most of the industry, is attempting to win back investors by showing its students can succeed. And so far, DeVry is navigating the disruptions to the industry. Revenue in the fourth fiscal quarter that ended on June 30 was up 7.9%, while net income rose 5.1%. While that may not be the stratospheric growth of the past, it's still growth amid a tough time for the industry.

But should you go back to school by adding DeVry stock to your portfolio? To find out, let's put the stock through the four tests considered at Ask Matt, including:

Step 1: Risk vs. reward. When you take a risk on a stock, you want to make sure you're properly rewarded. Downloading DeVry's trading history back to 1992, we see the company generated an annual compound rate of return of 4.9%, including the current dividend yield of 0.6%. That's a poor return if you consider the S&P 500 returned an annualized 7.1% return over the same period, says IFA.com.

And to get that lower-than-average return, you had to take greater risk. You accepted risk — standard deviation — of 38 percentage points. By investing in DeVry you took on 155% more risk to get a 31% higher return. Much greater risk for less return: That's not a great tradeoff and a good reason for long-term investors to bypass DeVry. But you're not asking about the long term, and are curious about speculating in the short term, so it's worth looking at the stock in another way.

Step 2: Measure the stock's discounted cash flow. Some investors decide if a stock is pricey by comparing its current price with the present value of its expected cash flows. It's a complicated analysis made simple with a system from New Constructs.

When we run DeVry's stock, we find it's rated "very attractive." In other words, the current stock price is well below the value of what the company is expected to generate in cash over its lifetime. New Constructs charges for its reports, but a free DeVry report is available to Ask Matt readers. For investors looking for a fundamental reason to buy the stock, this is a good one.

Step 3: Compare the stock's current valuation with its historical range. BetterInvesting's Stock Selection Guide can help. If the company can increase earnings 16% a year the next five years, as analysts forecast, that would put the stock in the "buy" range. This indicates the stock is inexpensive relative to the earnings the company is expected to generate. Again, this is a sign that perhaps investors can see a reason to take a shot on this stock.