Investors have flocked to Diamond Foods (NAS: DMND) because the stock looks cheap at just over eight times earnings. However, the mantra of "buy low and sell high" can sometimes lead investors into a value trap. Shares of Diamond Foods may look tempting near a 52-week low of $18, but a closer look reveals that the company's problems aren't just skin deep. Below are three reasons investors should consider selling shares of Diamond Foods.
The cost of controversy
Trustworthy management is always something to consider before investing in a stock. If good people run a company, then there's a decent chance things are getting done the right way. Unfortunately, Diamond Foods seems to lack this essential trait.
In fact, the consumer goods company ousted its CEO and CFO in February after an internal investigation exposed improper payments to walnut growers. Since then the company's problems have snowballed. The stock is down more than 74% over the last 12 months. Diamond, which owns popular brands such as Emerald Nuts and Pop Secret popcorn, was forced to restate 2010 and 2011 earnings after a probe by the SEC.
The scandal also cost Diamond the Pringles brand, which it had planned to buy from Procter & Gamble (NYS: PG) earlier this year. P&G had agreed to sell its iconic potato chip business to Diamond in a $1.5 billion all-stock deal. Had the arrangement gone through, it would have been Diamond's largest acquisition to date -- making it the second-largest U.S. snack maker behind PepsiCo.
Instead, Diamond continued to slide deeper into the abyss. Meanwhile, as a Pepsi shareholder, I had hoped the snack giant would add Pringles to its $13 billion convenience-foods business. However, Kellogg (NYS: K) sweetened the deal for P&G by putting a $2.7 billion offer on the table. Diamond's loss was Kellogg's gain.
The cereal maker even took on $2 billion in debt to fund the deal. Nevertheless, it's more than worth it for Kellogg as the company gains a key ingredient in the snack industry -- complete with $1.5 billion in annual sales. But where did all of this leave Diamond Foods?
Diamond Foods in the rough
In March, the company's shareholders were clobbered with more bad news. Diamond Foods suspended its dividend. Yet another troubling sign that the food products producer is doomed. With the pile-on of disappointments you'd think that shareholders would get a clue.
Unable to get its act together in time to file restated financial reports, Diamond Foods now runs the risk of being delisted from the Nasdaq stock exchange. At this point, the company doesn't plan to hold its annual shareholder meeting next month. If the stock were forced to delist, current shareholders would then own a high-risk investment traded on "over-the-counter" exchanges.
If I still owned shares of Diamond today, I'd get out now -- ahead of a potential delisting. Turns out I'm not alone in this decision. That's right, institutional investors have also been dumping shares lately.
Signs of a value trap
Diving into the 13F filings of big-shot money managers is a great way to find new investing ideas. That's because these reports detail what major investors are buying and selling.
Columbia Wanger Asset Management sold its full stake in Diamond Foods earlier this month, as my Fool colleague Selena Maranjian pointed out. Clearly, it's alarming to see a firm with a portfolio valued around $23 billion rush out of its position in the stock.
A deeper look at Diamond Foods' business does nothing to help the company's credibility. From questionable risk management to allegations of fraud, this hardly reads like a turnaround story. True, Diamond has a strong portfolio of brands. But that hardly matters if the stock is delisted from the Nasdaq. Sounds extreme, but, in this case, I'm afraid it'sinevitable.
A better choice for your portfolio
Diamond Foods is a sinking ship. Shares are hardly a bargain given the myriad challenges the company faces. Searching for great value in the stock market isn't easy. That's why The Motley Fool's top analysts have put together a free report to help you choose the best stocks available in the market today. Click here to discover "The Stocks Only the Smartest Investors are Buying," in this free report.
At the time thisarticle was published Fool contributor Tamara Rutter owns shares of PepsiCo and Procter & Gamble. Follow her onTwitter, where she uses the handle@TamaraRutter, for more Foolish insights and investing advice. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services have recommended buying shares of Procter & Gamble and PepsiCo. Motley Fool newsletter services have recommended creating a diagonal call position in PepsiCo. 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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