The Best Stock Under $5

 |  Includes: DNDN, LLY, PFE, PM, RAI, RCPI
by: James Altucher

All the stars are starting to be aligned for a smallcap stock, Star Scientfiic (CIGX). I'm a shareholder and have been buying more in this runup. In order for me to buy a smallcap stock, a lot of factors have to come into play. Star Scientific makes products to help people overcome their smoking habits. They are about to start selling a candy-like product called CigRx, where they've isolated the chemicals they think are the real reason people smoke cigarettes. The idea is if you take their candy, you won't need the nicotine-based cigarettes. However, as can be seen below, there are other reasons why it might be interesting to eat this CigRx candy and these other reasons might account for the recent runup in the stock and why it could be going much higher, as high as a $5-10 range.

1) Massive insider buying. After the stock had already run up more than 80% from 60 cents to $1.14 the CEO bought (at $1.14) 2.3mm shares for $2.7mm.

2) The largest investor in the company, Tradewinds Master Fund, also bought significantly more shares. They bought 1.7mm shares at $1.14 after already buying shares in December as low as 59 cents. So yes, they were significantly up on that earlier purchase but they think there are more gains to be had and they weren't afraid of averaging up. Tradewinds owns over 16% of the company. Because they have breached the 10% threshold, they can only buy new shares knowing that, as per SEC rules, they can't sell those shares for at least six months.

3) Alzheimer's Institute buying. Buried in a March 10 filing, a certain Robert Roskamp bought 769,000 shares for $1mm. He also bought the right (a warrant) to buy another 1,000,000 shares for $1.50.

Why is Robert Roskamp interesting? In 2003, he started the Roskamp Institute which is a (from Wikipedia) " biomedical research center with an emphasis on Alzheimer's disease. The institute is focused on finding the causes and treatments for neuropsychiatric and neurodegenerative diseases, particularly the Alzheimer's disease."

And it's not just a random institute. The chief scientist at the institute, Michael Mullan, was the scientist instrumental in discovering that the probable cause of Alzheimer's is directly related to the buildup of the beta-amyloid protein in the brain.

The Google Finance description of Star Scientific says:

Star Scientific is also engaged in the development of pharmaceutical products that have a botanical, tobacco-based component, that are designed to treat tobacco dependence and a range of neurological conditions, including Alzheimer’s disease, Parkinson’s disease,"

Could Roskamp's institute be doing tests on the Star Scientific product? Does he know something? I called him up and left a message and will post a response in the comments here if he calls me back.

I've written about Alzheimer's stocks before at WSJ, specifically the billions being spent on the disease by Pfizer (NYSE:PFE) and Eli Lilly (NYSE:LLY).

4) Short-term, out of the money options are heating up. The open interest on the April calls to buy this stock at $3 a share is over 3000 contracts. There are people out there who are willing to put money to work betting that this stock will be over $3.25 (since the call right now costs 25 cents) by mid-April (the options expire worthless on April 16 if the price of CIGX is below $3). The volume spiked enough to attract the interest of the optionMonster website which tracks unusual behavior in options. They wrote in an email:

optionMONSTER's Heat Seeker tracking system detected unusual activity in the April 3 calls. Some 1,935 contracts changed hands against open interest of 560, with most of the transactions pricing for $0.35. Calls outnumbered puts in the name by a bullish 20-to-1 ratio.

Disclosure: I've owned shares for a while and also bought on this run-up (as high as $1.40). I may hold, buy more, sell. But I'm intrigued because of the confluence of factors that seem to be suggesting this ride up can continue in a significant way ($5+). The stock reminds me of Dendreon (NASDAQ:DNDN), which hung out in the $2-5 range before jumping into the $20s on a good announcement and then settling into the $30s. I'll update in the comments section of this article as I hear more news.

Additional Disclosure: Long CIGX