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This Metric Says You Are Smart to Sell Star Scientific, Inc. (STSI)

Is Star Scientific, Inc. (NASDAQ:STSI) undervalued? Prominent investors are in a pessimistic mood. The number of bullish hedge fund positions were trimmed by 2 lately.

In the eyes of most investors, hedge funds are viewed as worthless, outdated financial vehicles of yesteryear. While there are greater than 8000 funds trading today, we hone in on the top tier of this club, about 450 funds. It is estimated that this group controls the lion’s share of the smart money’s total asset base, and by monitoring their best investments, we have come up with a few investment strategies that have historically beaten the S&P 500 index. Our small-cap hedge fund strategy outstripped the S&P 500 index by 18 percentage points annually for a decade in our back tests, and since we’ve started sharing our picks with our subscribers at the end of August 2012, we have outperformed the S&P 500 index by 24 percentage points in 7 months (see all of our picks from August).

Equally as important, optimistic insider trading activity is another way to break down the world of equities. Obviously, there are plenty of stimuli for a corporate insider to drop shares of his or her company, but just one, very simple reason why they would buy. Many academic studies have demonstrated the market-beating potential of this method if shareholders know where to look (learn more here).

Keeping this in mind, it’s important to take a glance at the key action regarding Star Scientific, Inc. (NASDAQ:STSI).

How are hedge funds trading Star Scientific, Inc. (NASDAQ:STSI)?

At the end of the fourth quarter, a total of 5 of the hedge funds we track were long in this stock, a change of -29% from the previous quarter. With hedgies’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were boosting their holdings substantially.

Of the funds we track, D E Shaw, managed by D. E. Shaw, holds the most valuable position in Star Scientific, Inc. (NASDAQ:STSI). D E Shaw has a $1 million position in the stock, comprising less than 1% of its 13F portfolio. Sitting at the No. 2 spot is Citadel Investment Group, managed by Ken Griffin, which held a $1 million call position; less than 1% of its AQR CAPITAL MANAGEMENT13F portfolio is allocated to the company. Other peers that are bullish include Russell Lucas’s Lucas Capital Management, Cliff Asness’s AQR Capital Management and Ken Griffin’s Citadel Investment Group.

Due to the fact that Star Scientific, Inc. (NASDAQ:STSI) has witnessed bearish sentiment from hedge fund managers, it’s safe to say that there is a sect of money managers that decided to sell off their full holdings last quarter. It’s worth mentioning that Malcolm Fairbairn’s Ascend Capital dumped the biggest position of the “upper crust” of funds we key on, and J. Alan Reid, Jr. of Forward Management was right behind this move, as the fund dropped less than a million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 2 funds last quarter.

What do corporate executives and insiders think about Star Scientific, Inc. (NASDAQ:STSI)?

Insider purchases made by high-level executives is particularly usable when the company we’re looking at has seen transactions within the past half-year. Over the latest 180-day time frame, Star Scientific, Inc. (NASDAQ:STSI) has experienced zero unique insiders buying, and 1 insider sales (see the details of insider trades here).

Let’s go over hedge fund and insider activity in other stocks similar to Star Scientific, Inc. (NASDAQ:STSI). These stocks are Astex Pharmaceuticals, Inc. (NASDAQ:ASTX), SIGA Technologies, Inc. (NASDAQ:SIGA), AcelRx Pharmaceuticals Inc (NASDAQ:ACRX), Raptor Pharmaceutical Corp. (NASDAQ:RPTP), and Regulus Therapeutics Inc (NASDAQ:RGLS). This group of stocks are in the drug manufacturers – major industry and their market caps are similar to STSI’s market cap.

Company Name # of Hedge Funds # of Insiders Buying # of Insiders Selling
Astex Pharmaceuticals, Inc. (NASDAQ:ASTX) 9 0 3
SIGA Technologies, Inc. (NASDAQ:SIGA) 3 0 0
AcelRx Pharmaceuticals Inc (NASDAQ:ACRX) 6 1 0
Raptor Pharmaceutical Corp. (NASDAQ:RPTP) 4 0 5
Regulus Therapeutics Inc (NASDAQ:RGLS) 2 3 0

With the results shown by our tactics, retail investors must always pay attention to hedge fund and insider trading sentiment, and Star Scientific, Inc. (NASDAQ:STSI) is no exception.

Click here to learn why you should track hedge funds