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
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.
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
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.
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.)
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
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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Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Procter & Gamble and PepsiCo, but she holds no other position in any company mentioned. Check out her holdings and a short bio. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services have recommended buying shares of Procter & Gamble and PepsiCo and creating a diagonal call position in PepsiCo. We Fools don't 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. The Motley Fool has a disclosure policy.