President Reagan famously quipped, "The nine most terrifying words in the English language are: 'I'm from the government and I'm here to help.'" The implication being that government invariably harms -- which makes me wonder: What if the government intends to harm?

Tobacco is a prime example. We could argue the merits of litigious maneuvering against Big Tobacco until the Chicago Cubs win another World Series, but that would be pointless. The point is that government litigation occurs, and the lingering question is: "What does that mean for investors?"

Today's trashing, tomorrow's treasure
Surprisingly, it can mean a buying opportunity. At least that's been the historical case with Big Tobacco. The biggest of Big Tobacco, Altria (NYSE:MO), demonstrates how judicial hectoring creates buying opportunity. State-level antitobacco rancor culminated with the May 24, 1994, announcement that Mississippi was suing tobacco companies to recover Medicaid costs associated with treating smokers. Within months, other states had either followed with suits of their own or begun settlement negotiations with the tobacco companies.

The lawsuits couldn't have been more ill timed; Altria's stock was already reeling from Marlboro Friday. It remained depressed through most of 1993 and early 1994, until May 24, 1994, after which Altria doubled in price over the next two years.

An encore followed in 1997. Swamped with the prospect of defending multiple state lawsuits, the major cigarette manufucturers sought a national compromise, which included a $368.5 billion tobacco industry payment over 25 years.

Altria's share price hovered between $8 and $10 for most of 1997 and through mid-1998, weighted down by uncertainty about the final compromise. But in the second half of 1998, when the odds were growing that the final settlement would be less than the initial figure, Altria's shares began to rise, culminating with the Nov. 23, 1998, Master Tobacco Settlement Agreement, which stipulated $206 billion would be paid out over 25 years. Altria closed at its high for the year, $13.46. In 1999, litigation -- private and public -- would contribute to a repeat cycling of Atria's stock price.

The new pariah
Payday lending is today's tobacco, albeit on a more modest, less confiscatory, but equally as ill-timed scale. Fifteen states and the District of Columbia have put the wood to payday lenders by limiting usury and fees, basically destroying the economics of the business. An Arkansas Supreme Court ruling last year has led to almost all payday lending being halted in Arkansas.

Payday lending might be as odorous as cigarette smoke to some, but it can be as redolent as freshly sliced pineapple to a cash-strapped renter facing month's end. Some politicians are beginning to recognize that fact. In 2004, Georgia outlawed payday lending, only to reinstate it three years later (with a cap on fees).

I suspect other states will loosen usury and fee laws when they, too, realize that payday lenders provide a valuable service, which usually occurs after the political upside from populist perorations has been exhausted.

What it is and isn't
Payday lending isn't pawn lending, a not-inconsequential point lost on some investors. Pawn shops, such as EZCORP (NASDAQ:EZPW) and Cash America (NASDAQ:CSH), lend on tangible assets. For some reason, lending against a Civil War Enfield musket fails to raise the same ire as lending against next week's paycheck. Good for the pawn lenders, because they've avoided the carnage ... but the carnage creates potential upside.   

Because of the bloodbath, I see potential upside in primary payday lenders. Advance America (NYSE:AEA) is down 76% from its five-year high, QC Holdings (NASDAQ:QCCO) is down 68%, and CompuCredit (NASDAQ:CCRT) is down 91%. On a positive note, all are up strongly from the early March 2009 lows: QC Holdings has rebounded 50%, CompuCredit has more than doubled, and Advance America has increased nearly six-fold.

CompuCredit is the weakest link in this triumvirate. It has struggled mightily to reorganize itself over the past year and is still too unsettled and risky for my taste. I see a better risk-return matrix in Advance America and QC Holdings. From this pair, I tip my hat slightly to QC Holdings; its trailing-12-month price-to-earnings ratio of 6.5 trumps Advance America's 9.4, as does its price-to-sales ratio of 0.46. QC Holdings' long-term debt-to-equity ratio of 59.6% plays to my aversion to financial risk, while its superior 15.9% return on assets appeals to my desire for signs of management efficiency.  

And then there's QC Holdings' dividend, currently doled out at the rate of $0.05 per quarter to yield 3.3% at the current price (here, the nod goes to Advance America's 4.4% yield). That appeals to my desire to be compensated while I wait for price appreciation, which I expect will return with a less hostile political zeitgeist.

Fool contributor Stephen Mauzy, CFA, holds no positions in the stocks mentioned. The Motley Fool has a disclosure policy.