Harley-Davidson stock: Take a ride, but wear a helmet

— -- Q: What do you think of Harley-Davidson stock hog?

A: I hope investors in motorcycle maker Harley-Davidson have been wearing their helmets.

Shares have skidded as Harley deals with a drop in revenue resulting from a weak economy. The stock is down nearly 80% from its highs in November 2006 and is off about 50% in the past year.

Does the wipeout mean it's time for you to saddle up and take Harley for a spin in your portfolio? To find out, I'll put the stock through the four tests we consider 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 Harley's trading history back to 1986, we see the company generated an average annual compound rate of price appreciation of 26.3%. This is a high return; the S&P 500 posted an 8.9% average annual return in the same time frame, says IFA.com.

If you owned Harley, you accepted risk — standard deviation — of 42.9 percentage points. That's much higher than the 15.8 percentage point risk of the S&P 500 during the period. But for 171% higher risk, you got a 196% higher return. That makes Harley, despite the nerve-rattling risk, one of the few stocks that justifies its volatility with a market-beating return.

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 Harley's stock, I find it's rated "very attractive." In other words, the stock is inexpensive 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 10% 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. Investors must also believe the company can maintain a high growth rate.

Step 4: Check the company's financial health. Before investing in a 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). Harley scores an acceptable 2.7 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 name into the Get a Quote box.

Bottom line: There aren't many stocks that pass all the tests considered here, but you can add another: Harley. For most investors, buying a diversified basket of stocks is the ideal strategy. But if you're looking to take a chance and buy an individual stock and are prepared for the tremendously higher risk, Harley is worth looking at. Just make sure you wear a helmet and be prepared to sell if it falls more than 10% from what you paid.

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. Follow Matt on Twitter at: twitter.com/mattkrantz