Star Scientific at $3: Underdog or Just a Dog?

Short-sellers and hedge funds may be shadowy, but sometimes they are the smartest guys in the room. They've done their homework, and they're willing to bet their capital against the crowd -- an investing strategy that can be as lucrative as it is contrarian.

On Motley Fool CAPS, the 180,000 member-driven investor community where informed opinion is translated into stock ratings of one to five stars, we've also got investors who find the chinks in a company's armor and correctly call its fall. We call them "Underdogs" if they've earned 100 or more CAPS points by correctly predicting that one or more stocks would underperform the market.

Today I'm looking at nutritional supplements maker Star Scientific (Nasdaq: STSI  ) , which is down 39% from the highs it hit this past summer, but has nearly doubled from its lows and carries a one-star CAPS rating (out of five). Having made the switch from "healthy" tobacco to supplements, it hopes the next step forward is a big leap in curing Alzheimer's disease.

It's been an up-and-down ride, so if there are investors who've scored big by correctly predicting which stocks will fail, it may be worth our while to check out those they think will succeed. CAPS All-Star SLemke42 is one who's earned the underdog moniker and previously predicted Star would smoke out the doubters.

Star Scientific snapshot

Market Cap

$514 million

Revenues (TTM)

$5.4 million

1-Year Stock Return

19.2%

Return on Investment

(264.3%)

Estimated 5-Year EPS Growth

N/A

Dividend and Yield

N/A

Recent Price

$3.10

CAPS Rating (out of 5)

*

Source: FinViz.com. N/A = not available; Star Scientific doesn't pay a dividend.

Of course, not every short sale goes as planned, which makes shorting a risky proposition. Stock prices can be irrational longer than you have money to stay in the game. And you don't want to end up with fleas by lying down with dogs until you do your homework.

Up in smoke
For a while, it looked as though Star Scientific might have hit pay dirt with its technology that reduced carcinogens in tobacco products, receiving patent protection and taking on Reynolds American (NYSE: RAI  ) for infringing on those patents (and wrangling a $5 million settlement from the company). It also got the Food and Drug Administration to agree to designate the company's "smokeless tobacco" products with a modified risk label, meaning they wouldn't be subject to the same regulations covering cigarettes from Reynolds, Altria (NYSE: MO  ) , or Lorillard (NYSE: LO  ) .

Along the way, though, it also developed an anti-inflammatory formulation using anatabine that it calls Anatabloc, which could be used for treating chronic inflammation associated with disorders such as thyroiditis, cancer, arthritis, Alzheimer's disease, and multiple sclerosis. It seems it was mostly Star's touting its therapy as a cure for Alzheimer's that rubbed most people the wrong way.

Remember this
Yet Star maintains it is on the right path when it comes to Alzheimer's research and recently pointed to new studies at the Roskamp Institute, a biomedical research facility that pays particular attention to Alzheimer's disease, which found that anatabine processed with Star's proprietary technology can suppress brain inflammation in animal models with the disease.

Originally Anatabloc was marketed exclusively toward physicians, but earlier this year Star sought to bring the supplement to a more mass-market audience and signed an agreement with GNC (NYSE: GNC  ) to sell Anatabloc through its online store. It also signed up pro golfer Fred Couples to promote the supplement at PGA events.

Despite its critics, Star Scientific continues to fight, and while some suggested it gave insiders a sweet deal in a financing arrangement, it also gave the supplement maker the financial wherewithal to continuing to fund its operations and was the spark for the stock's resurgence.

As it recorded sales last quarter of $1.7 million on the strength of Anatabloc, tell me in the comments section below whether you think the dietary supplement will be found to have more important properties in the fight against disease.

There's no need to fear...
Altria has been the best-performing stock of the past 50 years, but as the number of smokers in the U.S. continues to steadily decline, is Altria still a buy today? To find out whether everyone's love-to-hate dividend stock is a savvy investment choice or a hazard to your portfolio, simply click here now for access to The Motley Fool's new premium research report on the company.


Read/Post Comments (6) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 05, 2012, at 5:38 PM, taraowner wrote:

    Well i take it and it relieves pain from 2 torn meniscus surgeries, as well as helps with recovery pain from working out. But the best results come from my doctor who doesn't understand why my BP is well with in normal range, inflammation levels are below normal, and also helps tremendously with being Celiac DH dermatitis outbreaks. I don't think it can cure anything but i am not willing to take the chance of being a AZ patient just yet. Take it if you have issues and judge for yourself.

  • Report this Comment On December 06, 2012, at 7:39 AM, goldie7 wrote:

    It is a great product. It relieves pain for me from fibromyalgia.

  • Report this Comment On December 06, 2012, at 1:56 PM, chipbuster wrote:

    Anatabloc works for my secondary hypothyroidism, rheumatoid arthritis, and it cut my PSA score in half.

  • Report this Comment On December 06, 2012, at 4:56 PM, fjl1946 wrote:

    I have been on anatabloc since Aug.2011,started it for rotator cuff pain that I have had since 2001. I went thru the winter season without the normal aches from shoveling snow by hand. Also found out it releived my sinus problems that I have had for at least 15 yrs. I also no longer get up for the nightly bathroom trips for the Prostate problems I have had since I was 50,now 66yrs. old. No more side effects from prescribed meds for the issue and I no longer take them! Arthritis in fingers and joints much better ,no more NSAIDS needed. I have a herniated disc and 2 degenerating discs in my lower back, very seldom do I feel the pain that I lived with since 1992! I will stay on ANATABLOC It is worth every dollar.

  • Report this Comment On December 06, 2012, at 7:27 PM, Brinks2 wrote:

    Anatabloc has changed my life for the good. I am one of the following GNC Testimonials. Go read for yourself at www.gnc.com Anatabloc

    GNC Testimonials Anatabloc: http://tinyurl.com/9w655yr

  • Report this Comment On December 07, 2012, at 6:56 PM, oldman144 wrote:

    I Just suffered through a 45 minute plug on why an mystery company is about to go to the moon. The price for this information - a mere 2 grand. UGG.

    The fellow gave way too much information and with a bit of cross-digging came up with Star Scientific.

    So if you want to get rich beyond your wildest dream---- blah blah bla..

    I might just buy 300 shares, when the falling knife hits the cellar. Or not

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