Buy, Sell, or Hold: Diamond Foods

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Diamond Foods (Nasdaq: DMND  ) today and see why you might want to buy, sell, or hold it.

Founded in 1912 and with a market capitalization near $400 million, Diamond Foods is a small maker and seller of snack foods such as roasted, glazed, and flavored nuts; trail mixes; dried fruit; seeds; microwave popcorn products; and potato and tortilla chips. Its brands include Emerald, Pop Secret, and Kettle. Its stock has fallen more than 70% over the past year, so as you might imagine, many are shunning it, while others wonder whether it's a bargain.

Buy
The first thing to know about Diamond Foods right now is that there's a bit of a soap opera behind its stock's decline. Back in 2011, Diamond announced plans to buy the Pringles brand from Procter & Gamble (NYSE: PG  ) , which was selling off its foods, such as Crisco, Jif, and Folgers. But Diamond then got embroiled in an accounting scandal, which killed the deal. Kellogg (NYSE: K  ) ended up stepping in and buying Pringles.

So far, that doesn't seem like a reason to consider buying Diamond Foods, but hold on: Its stock has fallen so far that it's now a more attractive acquisition target. Kellogg itself, for example, is rumored to be thinking about buying all of Diamond. That could be smart for Kellogg, as the snack-food business is growing faster than many of its offerings. It could also benefit Diamond shareholders, as buyouts are typically done at a premium to a stock's current price.

Another reason to think favorably about Diamond is that before it imploded, it was actually doing rather well, with an expected five-year growth rate of 15%. It might be a bit of a different company right now, but the snack-food industry will continue to grow, and it does have some valuable brands and businesses under its roof. The scandal hasn't taken away its operations and all its potential -- though it may have damaged them.

Sell
One key reason to consider selling, or steering clear of, Diamond Foods is that it's in a state of flux right now. In short order, the company has found itself in an accounting scandal, has had its top executives replaced, is in the process of restating two years' worth of its financial results, and has had some of its strategy derailed (such as its planned Pringles purchase). Right now it's not a company that's firing on all cylinders. Of course, this kind of special situation, while reflecting extra risk, can sometimes present extra opportunity.

Think hard about that management turnover, because it's important to have trust in the management of companies in which you invest, and it can take a while to establish trust.

If you ever had Diamond Foods on your radar for its dividend, scratch that. The company has suspended its payouts for now.

Finally, remember that even though the stock might seem really cheap now, that doesn't mean it couldn't fall further. Companies going out of business tend to look more and more like bargains -- until they no longer exist. (Not that Diamond Foods is necessarily doomed, of course.)

Hold (off)
Given the reasons to buy or sell Diamond Foods, it's not unreasonable to decide to just hold off. You might want to wait for it to finish restating its financials and for its new management team to become a little more seasoned and hone their strategy. You might wait for a string of profitable quarters, with lots of promising numbers trending up, too, and or for its dividend to be reinstated. You might wait for an even lower stock price as well, to offer a greater margin of safety.

You might also want to look at some of Diamond Foods' competitors, such as PepsiCo (NYSE: PEP  ) . Most folks know it rightfully as a beverage titan, but it's also the biggest salty-snack giant around, with brands such as Lays, Ruffles, Doritos, Tostitos, SunChips, and more. The company has suffered some, with domestic soda consumption waning, but it's experiencing faster growth abroad. It doesn't appear to be a screaming bargain at this point, but its long-term future seems solid.

ConAgra (NYSE: CAG  ) is an even more diversified competitor, with snack brands such as Orville Redenbacher's, David Seeds, Fiddle Faddle, Jiffy Pop, Slim Jim, Poppycock, and Crunch 'n' Munch. But they're part of a much bigger portfolio, featuring brands such as Healthy Choice, Hunt's, Wesson, and Marie Callender's. ConAgra is expanding its frozen-food business and also adding to its snacks, via a private-label chip-maker.

The verdict
I'm holding off on Diamond Foods, and one colleague has referred to it as "a sinking ship," but everyone's investment calculations are different. Do your own digging and see what you think. Remember that there are plenty of compelling stocks out there.

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