Diamond to Coal ... Back to a Diamond

Diamond Foods (NASDAQ:DMND) was a monster stock for a long time, rallying from $20 in December 2008 to $96 in September 2011 -- and then the shorts pounced.

Scuttlebutt of funny accounting attracted all the shorts out there, and the stock promptly collapsed.

As it turns out, the shorts were right; the company was cooking more than popcorn and potato chips. An internal review admitted as much, resulting in the ousting of then-CEO Michael Mendes. That action got the biggest shorter in the business to take profits, as David Einhorn seemed surprised at the swift mea culpa from the company.

Still, the current short position is 46% of the float, as this is a group that could teach a school of piranhas the real killer instinct.

An SEC probe suggests $80 million in accounting mistakes between 2010 and 2011. The company was supposed to have a restatement ready in June but missed that deadline. Last week, that deadline was moved to December 7, with a shareholder meeting no later than January 24, 2013.

In the meantime the company does have 1,700 employees and a roster of products:

 Pop Secret popcorn  Diamond brand nuts  Emerald brand nuts  Kettle chips

Fundamentally, the stock is probably trading at less than book value. Technically, the stock is straddling its 50-day moving average and seems to have found support. If there is news that proves the sins were less than punishment already administered then this stock has a lot of room to the upside, as the 200-day moving average is north of $26.

This is a high-risk idea and a stock that might never see its old highs. It’s been my experience that once tainted with an accounting scandal the Street never completely forgives -- but stocks can make big moves off established lows.

On that note, I would look at $18 as a stop-loss point.

Charles Payne, a FOX Business contributor, is president of Wall Street Strategies. At the time this article was published he, his firm and/or his family did not own securities in Diamond Foods.