Where is the Short Covering in Diamond Foods?

Diamond Foods, Inc. (NASDAQ: DMND) has issued its restatements and shares being rewarded with fresh 52-week lows. This is becoming nothing short of a disaster. Usually we might expect that a short-covering rally would be seen. If not a rally, perhaps at least some short sellers covering (by buying shares) might offer some support. Guess again.

It should be known that this dog of a stock did recover in the two days ahead of the restatement. That was likely some short covering and some bottom-fishing by the few remaining people willing to speculate around such speculative and risky companies of this sort. Shares had risen from $18 to $20 in the last two days before settling at $19.50 on Wednesday.

So what about those short sellers? The stock is down 21% at $15.35 in mid-day trading on more than 2.3 million shares. The average volume is now down to only about 310,000 shares. The most recent short interest report from NASDAQ showed that the short interest was down to 7.71 million shares at the end of October. While this is a year record on days to cover at 45.4, this is actually the lowest nominal short interest of 2012 and that nominal short interest has been in steady decline since peaking at almost 13 million shares in mid-February when shares were closer to $23.50.

What appears to be happening is that the short sellers may only be offering support today as they take their profits by buying shares today. In short, without those short-covering share purchases, Diamond Foods would probably be trading even lower.

The volume is put and call options is also very disappointing because this Friday is options expiration date for November. In fact, options volume is so pathetic that all we can say is traders are making upside bets to $19 or $20 and further downside bets to as low as $10 in the December and January expiration dates. Again, options trading volume is just pathetic.

What you are seeing here is a situation where the short interest looks massive. The reality is that short sellers may have already made the bulk of their money and have already been exiting this trade for months and months. When you see a lower and lower nominal short interest and a sharp rise in the days to cover, the obvious result is that the investment community has given up on caring about the Diamond Foods story.

Here is the company’s current guidance for 2012:

• Net sales: $975 to $980 million
• Snack sales: $600 to $605 million
• Culinary sales: $290 to $295 million
• Gross margin: 18.0% to 18.5%
• Adjusted EBITDA: $78 to $81 million

Without adjusting for any revisions, the prior annual sales figures (with a July 30 year-end) were $965.9 million in 2011, $680.1 million in 2010, and $570.9 million in 2009.

JON C. OGG