Buy, Sell, or Hold: Star Scientific


When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Star Scientific today, and see why you might want to buy, sell, or hold it.

Based in Virginia, the company is involved in dietary supplements and pharmaceutical products, among other things, and is perhaps best known for its smokeless tobacco offerings. (Its tag line: "Reducing harm at every level.") With a market capitalization recently above $400 million, the company's stock is up 23% over the past year and has averaged annual growth of 11% over the past decade.

One reason to consider buying the stock is its potential, as it's involved in a variety of attractive business lines. Many smokers are looking to cut back or find less harmful forms of tobacco. Star's CigRX is a dietary supplement designed as a smoking alternative, reportedly reducing the urge to smoke. The company has shifted its focus somewhat, too, favoring its supplements over smokeless tobacco products.

Its Rock Creek Pharmaceuticals subsidiary is working on botanically based products "designed to provide nutritional support in a range of neurological conditions, including Alzheimer's disease, Parkinson's disease, schizophrenia, depression, and Hashimoto's thyroiditis." Its anti-inflammatory formulation, Anatabloc, has been directed at such conditions, and has golfer Fred Couples as an ambassador.

Want growth? Star Scientific's revenue has been growing at an average annual clip of more than 30% over the past five years, and accelerating. Long-term debt has been shrinking, too, which also bodes well.

One reason to steer clear of Star Scientific is the fact that it's a penny stock, with a share price well below $5. Penny stocks are notoriously volatile and risky, in general, and have led many investors to lose money. Not every penny stock is doomed, of course, but it's a red flag warranting a close look.

Another concern is the fact that Star Scientific is heavily shorted, meaning that many investors expect it to fall in value -- so much so that they've bet against it. If it keeps rising, that could serve investors well via a "short squeeze," where disheartened shorters buy shares in droves as they exit their short positions, driving the share price up. But many times shorters are right.

Meanwhile, remember that rapid growth in revenue? Well, it's not complemented by a rapid growth in earnings. Net income is negative, and the company's share count has been rising, too, from about 80 million in 2007 to around 142 million recently. That's not great, because it means investors' ownership stakes are shrinking.

Also, considering how much cash the company has been burning, it doesn't have enough cash on hand to last it too long. Something will have to change, for the better. The company has recently been financing itself via investments by management, but these aren't the best deals for shareholders.

Hold (off)
Given the reasons to buy or sell Star Scientific, it's not unreasonable to decide to just hold off on it. You might want to wait for it to post several consecutive quarters or years of profitability, or for it to have more products selling briskly on the market.

If tobacco (and perhaps its addictive nature) drew you to Star Scientific, you might also check out some other tobacco companies, such as Altria , Philip Morris International , which recently yielded 5.6% and 4.1%, respectively. The latter is a spin-off of the former, focusing on sales outside the U.S., where the growth potential is higher and regulations and restrictions often lower. In the U.S., Altria faces a shrinking base of smokers and various other challenges such as anti-smoking campaigns. Still, it's been growing. One recent promising development for Philip Morris International are reports that tobacco might be used in flu vaccines. This angle could help it expand in China.

You might also look at the much bigger supplement specialist, GNC , which has been posting some solid results lately, featuring actual profits. It also offers a dividend, recently yielding 1.3%. Indeed, you'll find Star Scientific products sold at GNC. If you're a thrill seeker, you might look into Herbalife , too. There's controversy surrounding it, as famous activist investor Bill Ackman has been tearing it down, while it has been posting robust growth rates.

The verdict
I'm steering clear of Star Scientific -- but everyone's investment calculations are different. If it interests you, do your own digging and see what you think. The company may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.

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.

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Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, 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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