Is Diamond Foods Stock Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Diamond Foods (DMND.DL) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Diamond's story, and we'll be grading the quality of that story in several ways:

• Growth: are profits, margins, and free cash flow all increasing?
• Valuation: is share price growing in line with earnings per share?
• Opportunities: is return on equity increasing while debt to equity declines?
• Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Diamond's key statistics:

DMND Total Return Price data by YCharts

Source: YCharts.
*Period begins at end of Q1 2010 (Jan. 30).

DMND Return on Equity data by YCharts

Source: YCharts.
*Period begins at end of Q1 2010 (Jan. 30).

How we got here and where we're going
Anyone who's followed Diamond's perilous saga over the past few years should not have expected the company to turn in a particularly great performance on these tests. Two out of eight passing grades (the final grade is exempted due to the dividend's suspension) is about par for the course, but this low starting point offers the company ample room for improvement over the next year. The company's surprise quarterly profit has boosted shares to their highest level of 2013, but there's a long way to go before Diamond can recapture its pre-scandal peak.

So, how can Diamond get back there? Well it's going to require stringent accounting controls from here on out. The announcement of a new CFO, concurrent with Diamond's positive earnings, are reassuring investors that better days will come. New CFO Raymond Silcock brings decades of financial-operations experience to his new post, and has overseen the finances of several food-industry companies before. Investors may rightly assess the move as one meant to restore integrity to a formerly questionable part of the Diamond executive suite -- Silcock should have no interest in ruining a career's worth of accumulated goodwill just to fluff up Diamond's finances.

On the other hand, Diamond might need to go back on the acquisition trail eventually, as its total quarterly revenue suffered an 11% year-over-year decline. Profits are on the upswing, but a company that posts declining top lines while its bottom line grows will probably fall under heightened scrutiny in due time. That time will be all the sooner for Diamond, owing to the shenanigans of its financial past. Further revenue declines are also expected in the upcoming quarter, which does not support the optimism of Diamond's recent pop.

Losing out on the Pringles brand to Kellogg (K 1.49%) was salt in the wound for Diamond two years ago, and the industry seems to be engaged in a consolidative arms race of late, leaving Diamond with fewer options than it once had. Diamond is now one of the smallest publicly traded snack-foods specialists in the industry:

DMND Market Cap data by YCharts

At a quarter the size of Snyder's-Lance (LNCE), Diamond could actually be a buyout candidate in its own right, assuming its larger competitors can come to trust its accounting. It would be an easy acquisition for either Kellogg or General Mills (GIS 1.93%), neither of which has any notable nut or popcorn brands to speak of.

Putting the pieces together
Today, Diamond has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.