COMMENTARY | COLUMNISTS | BRENT WILSEY

Diamond Foods' stock leaves a bad taste

We’re just a few weeks into 2013 and the stock market continues to climb higher.

I’ve been reading earning reports and listening to many companies discuss what they are seeing, and while the naysayers are looking for bad news based on the silliness of our government, it is not stopping American businesses from profiting by running a lean and mean business. Investors have profited as well, those that were not scared out because of the election or the "fiscal cliff." Year-to-date, the Dow Jones is up around 2.6 percent, so there is ample time for the smart investors who have their eyes set on Dec. 31, 2013 and know better than to worry about the short-term declines that will happen.

Look at the company and the fundamentals, not the craziness of the 6 o’clock news.

Clarence in San Diego writes that he enjoys my TV commentaries, Saturday morning radio show, columns and newsletters and he wants to know about Diamond Foods (Nasdaq: DMND).

Clarence, thank you for your kind words — it's always nice to hear that all the hard work is being helpful. Diamond Foods is a well-known company providing snack products under the name of Pop Secret and Kettle Brand. This stock has fallen from a high of $39.25, which was hit last January, and now trades around $14 per share.

Sales for the company have declined by 5 percent year over year, and earnings per share have fallen through the floor, dropping 502 percent. Without looking at the financial statements I know there had to be some write-offs. You may ask why I didn’t take some time to look at the income statement to find out what the reason for the 502 percent drop in earnings was for. It’s because there are too many other scary items on this company, and spending more time to do deeper research would not change this company from a "sell" to a "buy" for me.

The scary items include a debt-to-equity of 190 percent, compared to the industry average of 71 percent. On top of that the company’s price to tangible book value is not material. While earnings improve greatly from the estimated 26 cents in July 2013 to 78 cents in July 2014, using a forward multiple of 16.5 the target sell price for July 2014 is still only $12.87, below the current price. The company has a PEG ratio of 4.13 and pays no dividends.

Clarence, while it is possible for this stock price to increase, I think the risk is too high for me and would recommend investing your money elsewhere.

Don in Poway wants to know about General Electric (NYSE: GE). To summarize, Don bought the stock back in July 2009 at a price of $11.57, and with its current price of around $22, he's not sure if there is much left in the stock. Don was going to sell on Monday, but then saw some good info on GE about billions in cash coming in over the next three years and that could mean perhaps an increasing dividend and share buybacks.

Well, Don, lets first of all congratulate you on investing in the company back in 2009, fundamentally as I was saying back then it was the best time to buy the stock, but the hardest time emotionally.

After reporting earnings for the year ending Dec. 31, 2012, I do see that sales were flat for the company year over year; however, earnings per share increased 11.8 percent over the same period.

GE pays a current dividend of 3.5 percent using 50 percent of its earnings to pay that dividend.

One thing I want to point out to you and the readers is that something banks would never do is increase your yield. You bought the stock back in 2009, and since then GE has been increasing its dividend and currently pays 76 cents per year, which equals the 3.5 percent based on the current stock price. Since you bought the stock back in 2009 and paid $11.57, your yield on your initial investment is 6.6 percent. And if GE increases its yearly dividend by just 10 cents, your yield will rise to 7.4 percent. And people wonder why I get so excited about investing in the fundamentally strong stocks.

Since GE has reported earnings for 2012 we can now see that the mean of 12 analysts are looking for earnings per share of $1.85, which is up from December 2013 earnings per share of $1.67, a 10.8 percent increase. With a multiple of 16.5 and adding dividends the potential return on GE could increase another 40 percent plus.

As far as adding to the stock it does make sense looking out to December 2014, but I would not add to the position if the stock is more than five percent of your current portfolio. You don’t want to become over-concentrated in this company or any company for that matter. There are other good companies to invest in if you’re sitting on a lot of cash.

Have a question or a company you'd like me to take a look at? Email me at brent@wilseyassetmanagement.com.
Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.

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