J.C. Penney stock is on sale, half off, if you can take the risk

— -- A: If there's a stock you've been eyeing, now's a good time to consider buying.

With the Standard & Poor's 500 stock index down almost 40% this year, there are stocks down even more than that. J.C. Penney is an example, as the stock is down more than 50% this year as investors sold off shares of retailers.

Retailers have been hurt during the credit crunch. Not only do many consumers have less access to cash, many are now worried about hanging onto their jobs. As a result, consumers have dramatically cut discretionary spending, which includes things that J.C. Penney sells.

But if you liked J.C. Penney stock last year, you should love it this year, when it's 50% less expensive. But before you pull out your wallet and buy J.C. Penney, let's put the stock through the four-step Ask Matt test:

Step 1: Risk vs. reward. When you take a risk on a stock, you want to make sure you're properly rewarded. Downloading J.C. Penney's trading history back to 1980, we see the company generated an average annual compound rate of price appreciation of 4.8%. Even if you add the current dividend yield of 3.9%, that gets you to a total annual compound rate of return of 8.7%. This is relatively low; the S&P 500 posted a 10.6% return in the same time frame, says IFA.com.

And if you owned JCP, you accepted higher risk — standard deviation — of 42.8 percentage points. That's much higher than the 15.3 percentage point risk of the S&P 500 during the period. So to get an 18% lower return you accepted 179% higher risk. That's not a great tradeoff and should stop many investors' analysis right there.

Step 2: Measure the stock's discounted cash flow. Some investors decide if a stock is pricey by comparing its current price to the present value of its expected cash flows. It's a complicated analysis made simple with a system from NewConstructs. When we run J.C. Penney's stock, we find it's rated "attractive." In other words, thanks to the collapse in the stock, the price is less than the company is expected to generate in cash over its lifetime. Using this analysis, it would appear J.C. Penney is worth a closer look.