Diamond Foods: A Diamond In The Rough Or Cubic Zirconium?

| About: Diamond Foods, (DMND)

I am guilty of trying to "catch a falling knife" when it comes to Diamond Foods (NASDAQ:DMND). I have been punished severely for the error of my ways, by buying on the way down (taking a 33% bludgeoning in less than a four week period). You would think by now I would not be prone to such dumb mistakes (apparently my greed for a bargain overwhelms my restraint). To make matters worse, I bought the shares on margin. Will I ever learn? Probably not, as stubbornness is surely the culprit here.

This time around, I figured that if Oak Tree Capital (exponentially smarter and richer than I) was willing to sink a $225 million cash infusion into Diamond, my little $500 share commitment could be justified. Even the shorts are beginning to buy to cover, as evidenced by a short interest drop of 23% (from 12.97 million to 9.96 million shares). They might just be thinking it is time to ring the cash register, especially after the stock's colossal collapse from $90, stemming from last September's bombshell accounting scandal news.

In the meantime, talk of an impending nasdaq delisting has everybody so spooked that nobody will "touch the shares with a ten foot pole." The fear of a delisting is so overblown that investors are missing the forest for the trees by failing to recognize the redemptive qualities of its iconic brands: Pop Secret, Emerald and Kettle. The probability is simply overwhelming that DMND will not be delisted and the ultimate confirmation of this will vault the shares higher.

Bottom line: Don't try and pick a bottom on this one. It is worth paying more, by having the shares already trending higher, so resist the temptation of buying at this juncture. A better approach would be to hold off until the walnut purveyor's financials have finally been reported- lessening its toxicity levels. After all, Wall Street absolutely despises uncertainty. Once this dark cloud dissipates, a rally is sure to follow.

The stock presents a compelling risk reward ratio of 4:1 (thanks to my crude "back of a cocktail napkin" computation) indicating upside reward potential of $12 and downside risk of $3. In my book, risking $1 to make $4 makes perfect sense. There is no doubt at this juncture the market categorically does not agree with my assessment, seeing only cheap "cubic zirconium." Fortunately for value investors, "the market" is often wrong.

Disclosure: I am long DMND.