Star Scientific (NASDAQ: CIGX) has attracted enormous Seeking Alpha attention and, accordingly, hundreds of millions of investors' dollars for a lawsuit and rumored treatment for Alzheimer's disease. During 2012 alone, Seeking Alpha has published six positive (and no negative) articles about the company. Initial interest in this company was led by James Altucher, a prominent blogger and notorious market influencer, who wrote a Seeking Alpha article in March 2011 that sparked a 250% rally in Star Scientific's shares.
In this article, I will provide a fresh perspective on the $570 million in premium that is priced into the stock of Star Scientific. Specifically, I will look at the fundamental potential of Star Scientific's operations and compare it to a typical small-cap company, a role played somewhat arbitrarily by ChromaDex Corporation (CDXC). I noticed ChromaDex mentioned as one of hundreds of companies with a similar "minor legacy business + exciting story" framework as Star Scientific, making comparisons easy. However, my discussion is not intended to encourage nor discourage investment in either company -- both companies have serious pros and cons -- but rather for seeing the side-by-side effects of media coverage. Again, the goal of this article is simply to illustrate the price at which Star Scientific might be valued if fewer investors were aware of the company's story, as is the case with ChromaDex and hundreds of other small-cap companies.
The Difference Between $570 million and $60 million
Star Scientific: $570 million
At its core, Star Scientific sells consumer products that generated less than $2 million in revenues last year. Star Scientific's two anti-smoking products, CigRx and Anatabloc, accounted for substantially all of those revenues. Despite less than $2 million in revenues, however, investors still value Star Scientific as a company at $570 million.
So, why does Star Scientific trade at a staggering 300x earnings? There are two reasons.
- a license for a chemical that might be able to treat Alzheimer's
- pending litigation with RJ Reynolds
To summarize, Star Scientific trades at its current valuation of $570 million not because of the company's current revenues, but rather because of its future potential to earn money through lawsuits or sales of an Alzheimer's treatment. Whether rationally or irrationally, investors believe those future opportunities are now worth $570 million.
ChromaDex: $60 million
Turning now to ChromaDex, we notice annual revenues of $8 million, primarily derived from sales of the company's BluScience vitamin line at GNC, Walgreens, and Drugstore.com. With a market capitalization of $60 million, this means that ChromaDex trades under 8x earnings.
What other premium is priced into ChromaDex's $60 million valuation?
- pending human clinical data about the health benefits of BluScience vitamins
- possible future revenue from NR or C3G (ChromaDex's licensed compounds)
To summarize, ChromaDex's valuation is $60 million because of an earnings multiple (i.e. investors assume the company will sell more than $8 million in vitamins in coming years) as well as future revenue derived from new NR or C3G products. (Briefly, ChromaDex hopes these compounds will compete with Abbott Labs' billion-dollar Niaspan drug, aid in the treatment of neuropathy, and provide other health benefits.)
Compare and Contrast
As we have seen, Star Scientific's $570 million market capitalization is almost entirely based on speculative future revenue sources: a favorable lawsuit or revenues from a new Alzheimer's treatment. In contrast, ChromaDex's market capitalization ($60 million) is substantially based on future sales growth of its existing vitamin line, with a slight premium given to speculative future revenue from NR or C3G products.
Debt levels at both companies are negligible: $0.3 million at ChromaDex versus $4.4 million at Star Scientific (less than 1% of the market capitalization of both companies, respectively). Likewise, both companies have several million dollars in free cash, so there are no immediate liquidity concerns. Finally, there are no pending lawsuits against either company that might skew the general percentages below.
|worth $570 million||worth $60 million|
|trading at 300x last year's earnings||trading at 8x last year's earnings|
|debt less than 1% of market cap||debt less than 1% of market cap|
|cash is 3% of market cap||cash is 9% of market cap|
Both companies are pursuing multi-billion opportunities, and both could generate significant revenue. Nevertheless, investors are giving $570 million of value to Star Scientific's Alzheimer's and lawsuit potential, while giving $60 million to ChromaDex for its niacin, neuropathy, and obesity treatment candidates. It is self-evident that Star Scientific has 850% more premium than ChromaDex at least partially because it enjoys more media coverage. Both companies (and indeed, hundreds of other companies) are pursuing billion-dollar markets with great prospects for success. Star Scientific, however, is one of very few companies that has attracted $570 million in actual investment.
An Infographic Comparison
On the surface, it appears as though the pricing of Star Scientific shares is generous, but there are many factors that influence stock pricing. What follows is my own side-by-side comparison of Star Scientific and ChromaDex. Again, although ChromaDex appears to be more conservatively priced, investors must make their own decisions; and every small company has significant downside risks, regardless of the price of stock.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CDXC over the next 72 hours.