Collect a 3.5% Yield While Waiting for This Undervalued Diamonds to Shine – TheStreet.com

NEW YORK (TheStreet) — Unless you’re expecting rampant inflation tomorrow, don’t buy gold or diamonds, which tend to do well during times of inflation. It’s much more profitable to sell diamonds than to buy them, so for now, consider buying stock in Dominion Diamond Corporation (DDCGet Report) up to $15 to collect a safe 3.5% yield and a 33% gain. Some of the most legendary investors would.

Dominion Diamond owns and operates two large diamond mines in Canada. The company is not a retailer, rather it sells directly to the jewelry industry on a wholesale basis. After extracting the diamonds, Dominion measures the critical characteristics of each stone’s quality so that it can be priced for maximum value. The company then sells them off to customers who cut and polish them for setting as jewelry.

The price of diamonds peaked over thirty years ago (on an inflation-adjusted basis), when inflation was rampant and investors fled stocks and bonds for hard assets.

But with inflation now very low and not likely to reach those kinds of levels anytime soon, the best way to make money from diamonds is by owning stock in mines, especially ones that have a track record of growing earnings by more than 20% annually. The earnings-per-share growth rate for Dominion Diamond is 35.4%, based on the average of the three- and four-year historical rates.

That is just one of the tests used by famed investor, Peter Lynch, and the Baton Investing algorithm based on Lynch and nine other great investors.

Peter Lynch Model Likes Dominion Diamond As a Growth Stock

Like many of Baton’s best performing stocks, Dominion Diamond scores highly according to both growth and value formulas. In addition to earning a perfect score of 100% from our Lynch model, our Benjamin Graham’s “Value Investor” model also scores it highly at 71%.

Our Lynch model is built around his concept of the “PEG ratio”, which compares a company’s price-to-earnings ratio to the rate of growth in its earnings over the past several years. A PEG ratio of less than 1.0 implies that a company is growing its earnings at a faster rate than the market is valuing them, so Dominion Diamond’s PEG ratio of 0.48 is very favorable.

Another Lynch test is to compare the rate at which a company’s inventory is expanding versus its sales growth. Lynch was willing to tolerate inventory outpacing sales by no more than 5%. Since Dominion Diamond has seen its inventory level fall during the past year, it easily passes this test. Dominion Diamond also breezes through Lynch’s requirement that a company’s total debt/equity ratio be less than 10%. Dominion Diamond’s ratio is less than 4%.