Things are finally looking up in the diamond sector.

Rough diamond prices are on the rise after collapsing late last year. The Ekati and Diavik mines in Canada have canceled their planned winter shutdowns. And even some junior companies (Shore Gold Inc., Stornoway Diamond Corp., Peregrine Diamonds Ltd.) are making progress towards building the next generation of diamond mines.

BMO Capital Markets analyst Edward Sterck just came out and said it: this is a good time to put money back into this beaten-down sector.

"Rough diamond prices have recovered strongly from lows at the beginning of 2009. At the same time, diamond mining company share prices have lagged the share prices of companies mining other commodities, a discrepancy that the market is only just waking up to," he wrote in a note to clients.

Mr. Sterck also wrote that longer-term supply constraints suggest that rough prices should continue to accelerate over the next five to 10 years, as supply is forecast to fall 20% short of demand by 2020. He expects diamond companies to get re-rated higher by the market, though they may not receive the huge premiums they used to get.

He prefers Harry Winston Diamond Corp. over rivals Gem Diamonds Ltd. and Petra Diamonds Ltd., writing that Harry Winston is "still the premier-listed diamond investment." He rates it an "outperform" with a target of $12.00 a share.

At RBC Capital Markets, analyst Des Kilalea also wrote that the investment merits of the diamond sector "are starting to emerge again." However, he noted that a seasonally quiet period is possible, especially since polished prices are flat.

He prefers producing companies like Harry Winston and Petra to juniors like Shore or Stornoway. But he also said that companies with credible resources that can go into production in the next three to five years should see some doors opening as investors re-build positions in the sector.