Western Digital: This stock is for a real gunslinger

— -- Q: I'm thinking of buying some shares of Western Digital wdc. What do you think?

A: Western Digital makes disk drives used in computers, servers and other applications.

And as with many disk drive makers, WD has enjoyed a renaissance. Thanks to the ability to make smaller disk drives that can hold larger amounts of data, disk drives are showing up in all sorts of devices such as MP3 players, video game consoles and karaoke systems.

But do shares of the hard drive maker belong in your portfolio? To find out, we'll run Western Digital through four tests and see how it stacks up.

Step 1: Risk versus reward. When you take a risk on a stock, you want to make sure you're properly rewarded. Downloading Western Digital's trading history back to 1984, we see that the company generated an average annual compound rate of return of 28.8%. That is strong, and nearly three times the long-term return of the Standard & Poor's 500 stock index, says IFA.com.

But to get that return, you accepted sky-high risk (standard deviation) of 82 percentage points. That's about four times the S&P 500's long-term risk. So you're taking four times the risk to get a shot at three times the return. Not a great deal.

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 the stock, we find it's rated "neutral." In other words, the current stock price is equal to what the company is expected to generate in cash over it's lifetime. If you're looking for a bargain, you're not getting it with Western Digital at these prices.

Step 3: Compare the stock's current valuation to its historical range. BetterInvesting's Stock Selection Guide can help. If the analysts are right, and the company grows 10.5% a year the next five years, that would put the stock in the "buy" range. You're taking a big leap of faith, though, assuming that the company in such a mature and competitive industry can grow at a double-digit clip for five years.

Step 4: Check the company's financial health. Before investing in any company, you want to make sure it's in good financial shape. A quick way to check is to look at where it falls on the USA TODAY Stock Meter, which ranks stocks from conservative (1) to aggressive (5). Western Digital scores an aggressive-leaning 3.5 here. You can get a Stock Meter score for almost any stock by going to money.usatoday.com and putting the stock's ticker symbol or company name into the Get a Quote box.

What's the bottom line? You can do better. The hard drive business is infamous for its ups and downs and the volatility will probably drive you crazy. If you're willing to take so much risk, find an investment that offers the prospect of higher returns.

Matt Krantz is a financial markets reporter at USA TODAY. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.