NewMarket stock: If you're a risk-taker you might take this

— -- A: NewMarket is a difficult-to-describe company that despite its name is involved in several old markets.

Part of the company is connected to the oil business, in that it sells lubricants used in industrial oils. Another portion of its business is in the real-estate market, primarily in the Richmond, Va. area.

While NewMarket's businesses aren't exactly thrilling, the stock certainly has been a wild ride. Shares are up 120% this year, a stellar performance when the Standard & Poor's 500 is up 11%.

But does NewMarket belong in your portfolio? To find out, I'll run the stock through the four tests we use at Ask Matt:

Step 1: Risk vs. reward. When you take a risk on a stock, you want to make sure you're properly rewarded. Downloading NewMarket's trading history back to 1980, we see the company generated an average annual compound rate of price appreciation of 17.8%. This is high return; the S&P 500 posted a 10.5% average annual return in the same time frame, says IFA.com.

But here's the rub. If you owned NewMarket, you accepted higher risk — standard deviation — of 63 percentage points. That's much higher than the 15.5 percentage point risk of the S&P 500 during the period. So to get a 70% higher return you accepted 306% 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 I run NewMarket's stock, I find it's rated "neutral." In other words, the stock is neither cheap nor expensive relative to the cash the company is expected to generate over its lifetime.

Step 3: Compare the stock's current valuation to its historical range. BetterInvesting's Stock Selection Guide can help. If the company can increase earnings 15% a year the next five years, as analysts expect, that would put the stock in the "buy" range. That's a green light for investors who believe the price-to-earnings ratio will return to historical norms.