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 (NAS: 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

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 (NYS: 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 (NYS: MO) , or Lorillard (NYS: 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 (NYS: 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...
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The article Star Scientific at $3: Underdog or Just a Dog? originally appeared on Fool.com.

Fool contributor Rich Duprey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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