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Star Scientific (STSI), a maker of less-harmful tobacco products and dietary supplements, shows something which is often forgotten by the investing masses. It shows that share prices can be deceiving.

Most professionals know this already, though past instances such as the way Citigroup (NYSE:C) or Bank of America (NYSE:BAC) have traded sometimes leads me to believe that sometimes they, too, forget this basic truth.

So how can share prices be deceiving? The problem is that the number of shares outstanding differs from company to company. So a stock for company X being at $5 and for company Y also being at $5 means little. This is where market capitalization comes in. You multiply the share price by the number of shares outstanding, and then you start to have a real feel for how much the equity in a given company really is worth. If company Y has 10 times more shares out, then company Y is worth 10 times company X even though they trade at the same share price.

This brings us back to Star Scientific. Star Scientific is trading at $2.13 this morning, due to it having filed its 10-Q for the September quarter and in this 10-Q having disclosed that the consideration from the RJ Reynolds settlement came to just $7.1 million. Star Scientific traded mostly as a function of the possible outcome of this lawsuit, since it hardly has a business to speak of outside such event.

Now, the problem here is that Star Scientific, even at $2.13, still has a humongous market capitalization, because of its 146 million outstanding shares. In short, Star Scientific's existing business is still worth $310 million in the market, even though the share price, at just $2.13, might lead some to think it's already been quite penalized.

Finally, to top it off, Star Scientific is burning money - operating cash flow was a minus $12.4 million in the last 9 months - and has only $9.5 million in cash. So you have a small business with no longer any optionality, a decent likelihood of the cash lasting only 1 year more, and yet it still carries a $310 million market capitalization.

Conclusion

Although Star Scientific's share price might seem low, its market capitalization is still quite large implying a lot of downside all by itself. This is reinforced by the fact that Star Scientific is burning through all remaining cash at a quick pace.

Star Scientific is a short opportunity and might head down close to zero within one year.

Source: Star Scientific: How The Share Price Can Be Deceiving