Entergy probably won't add much power to a portfolio

— -- Q: Would you run Entergy ETR through your four-step process to see if it is a stock to buy?

A: You're already buying power from your local utility, should you also buy the stock?

You're asking about Entergy, which is an energy generation company that creates and sells electric power. It mainly deals electricity in Arkansas, Louisiana, Mississippi and Texas. But it also has a natural gas distribution business and produces and sells power in the northeastern U.S. from its nuclear power plants.

On the surface, the stock has a few things going for it, including a decent 2.9% dividend yield and a relatively healthy stream of revenue and earnings. The company's net income in the third quarter 2007, the latest available, rose 88% to $461.2 million.

But should you buy the stock? Whenever you consider buying an individual stock, you should put it through four important tests. You can look at past Ask Matt columns in the archives to learn how. But I'll show you, using Entergy as an example. Here goes:

Step 1: Risk vs. reward. When you take a risk on a stock, you want to make sure you're properly rewarded. Downloading Entergy trading history back to 1981, we see the company generated an average annual compound rate of return of 11.5%. Add the current dividend yield of 2.9% and that gives the stock a total long-term return of 14.4%. That is a solid return and 43% greater than the long-term average annual return of the Standard & Poor's 500 index.

But to get that return, you accepted risk — standard deviation of 28.4 percentage points. That's 48% more than than the S&P 500's long-term risk. Technically, you're not being compensated for the risk you're taking. But, we'll let the stock slide since the risk and return are relatively close.

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 Entergy's stock, we find it's rated "dangerous." In other words, the current stock price is greater than 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 Entergy at these prices.

Step 3: Compare the stock's current valuation to its historical range. BetterInvesting's Stock Selection Guide usually can help. If the company grows 8% a year the next five years as analysts expect, the stock falls into the "hold" range. Again, you're not getting a great value with this stock at current prices using this methodology.

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). Entergy scores a reasonable 2.2 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? Entergy's stock just doesn't spark, no matter how you look at it. It's not a big bargain nor a screaming growth stock story. The yield is decent, but investors looking for income could do better elsewhere with less risk. You might consider taking a pass on this one.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. 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.