Diamond Foods and Realty Income Are Heating Up

When a stock's share price is lower than a North Dakota thermometer in February, investors tend to give it the cold shoulder. But as fortunes change and the market warms to a stock's prospects, its price can heat up in a hurry. Unfortunately, it's hard to tell that a stock is melting investors' hearts until after it's made that upward leap.

Taking the market's temperature
But Motley Fool CAPS' proprietary ratings, aggregated from the opinions of 180,000-plus members, offer a great way to monitor investor sentiment. Following a CAPS rating trend, we can find previously low-rated companies that have recently enjoyed a bump in investor confidence and see whether they're truly heating up -- or headed back to the deep freeze.

Today we see that walnut grower Diamond Foods (Nasdaq: DMND  ) and REIT Realty Income (NYSE: O  ) have moved from a two-star rating on CAPS to three stars. Obviously, you don't automatically buy them because of this; rather, it becomes a starting point for further research. Yet if some of the best investing minds are taking notice of these stocks and upgrading their prospects, maybe we should too.

Caution: Contents may be hot
As difficult as it may be, investors considering whether to put money in Diamond Foods have to forget about what could have been. Had they been successful in acquiring the Pringles business from Procter & Gamble (NYSE: PG  ) , the nut grower would have been the second biggest snack foods company behind PepsiCo's (NYSE: PEP  ) Frito Lay division. But an accounting scandal over improper payments to walnut growers sunk those hopes and led to a wholesale change in management. Instead, Kellogg bought the chips brand and will see its snack business triple in size.

While management is committed to getting the company back on its feet, buying in to the hope amounts to buying a pig in a poke. Diamond hasn't filed any financial reports since its annual report last September, and because it hasn't held its shareholder meeting because of the turmoil, the Nasdaq exchange notified it its stock could be delisted. Sure, that's a lot of boilerplate, and the exchange typically grants extensions for companies going through changes, but it underscores that investors really don't know what they're buying.

I've said it's possible the clean sweep in the executive suite could help Diamond Foods advance, but I also believe it's just as likely it could trade in a tight range for some time yet. No doubt those calling for better outcomes agree with CAPS member ddobronski, who says Diamond is "Beat up, great brands, they will restate earnings and improve from here."

Tell me in the comments box below whether you'd have to be nuts to buy Diamond Foods without knowing more.

Inside-the-park homerun
Locking in big-name tenants to long-term lease agreements gives REITs a sense of stability and investors peace of mind. When they can get those tenants to pay not only the rent, but the taxes, insurance, and maintenance fees as well, it's like hitting a home run as a property's capitalization rate -- the expected rate of return a particular property will yield -- will generally be greater. So-called triple-net REITs can be standout stars in a portfolio.

Yet under the Fed's artificial low-interest-rate policies, the spread between cap rates and Treasury notes has narrowed, giving investors more investment options and leading triple-net REITs to underperform the industry last year. Some, however, notably Realty Income, have thrived, not least because it enjoys a lower cost of capital than many of its peers, like CapLease (NYSE: LSE  ) . Shares are up 25% so far in 2012 and have increased by a third over the last 12 months. Indeed, since the market turned in March 2009, Realty Income has nearly tripled in value. Other low-cap-cost operators like American Capital Realty Trust are also doing well. It went public earlier this year and is up 17% from its IPO.

Not that bumps don't appear in the road. Having marquee names like PetSmart, FedEx, and Taco Bell Realty Income for tenants occasionally causes trouble that can impact operations. When Friendly Ice Cream emerged from bankruptcy last year, it rejected 19 of the 121 leases it held, representing $1.8 million in annualized rent. Earlier this year, Realty Income said it expected to see a number of tenants declare bankruptcy in 2012 that would impact as much as 2% to 3% of its rent portfolio.

Of course, it's the dividends that attract many investors to triple-net REITs, and Realty Income yields a healthy 6%, which lured in CAPS member busterbuddy, who notes, "It pays monthly dividends. The combination of dividends and capital gains should provide a outperform return."

Weigh in yourself in the comments section below if you think Realty Income will offer investors nothing but net.

Checking the mercury
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Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services have recommended buying shares of PriceSmart, Procter & Gamble, PepsiCo, and FedEx. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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