Short-sellers and hedge funds may be shadowy, but sometimes they are the smartest guys in the room. They've done their homework, and they're willing to bet their capital against the crowd -- an investing strategy that can be as lucrative as it is contrarian.

On Motley Fool CAPS, our 180,000-member-driven investor community where informed opinion is translated into stock ratings of one to five stars, we've also got investors who find the chinks in a company's armor and correctly call its fall. We call them "Underdogs" if they've earned 100 or more CAPS points by correctly predicting that one or more stocks would underperform the market.

Today I'm looking at nutritional supplements maker Questcor Pharmaceuticals  -- which has lost almost half of its value, yet is also 75% above the lows it hit in September after a new round of attacks on its value. Noted short-seller Citron Research started it off in July with accusations about its multiple sclerosis drug Acthar that analysts dismissed as old hat, though shares lost a fifth of their value at the time.


The real pain came after insurer Aetna said it would only cover one of Acthar's multiple indications. With a two-star rating, it's been fighting back, using the strength of its prescriptions to quell doubts.

It's been an up-and-down ride, so if there are investors who've scored big by correctly predicting which stocks will fail, it may be worth our while to check out those they think will succeed. CAPS All-Star cubaislibre is one who's earned the underdog moniker and previously predicted Questcor would rout the shorts.

Questcor Pharmaceuticals snapshot

Market Cap

$1.8 billion

Revenues (TTM)

$167 million

1-Year Stock Return

(31.6%)

Return on Investment

113.4%

Estimated 5-Year EPS Growth

33.5%

Dividend and Yield

$0.80/2.7%

Recent Price

$30.06

CAPS Rating (out of 5)

**

Source: FinViz.com.

Of course, not every short sale goes as planned, which makes shorting a risky proposition. Stock prices can be irrational longer than you have money to stay in the game. And you don't want to end up with fleas by lying down with dogs until you do your homework.

Up in smoke
Because Questcor has only Acthar on the market, it carries more risk that other drug companies that have backup plans in their product pipeline. That's why every pronouncement about insurance coverage, possible generic competition, or a discussion of pricing causes Questcor's stock to jump or fall. As more time passes, though, it seems the drug may be able to prove itself.

While Aetna's decision played a big role on its stock, management doesn't believe it will have a material impact on the company's operations since the insurer only accounted for 5% of shipped prescriptions. As there hasn't been a wholesale flood of insurers following Aetna's lead, it seems to be a limited problem. Indeed, UnitedHealth Group's Oxford Health Plan said it will continue its reimbursement policies for Acthar.

Competition is always an issue for a drugmaker, and Questcor faces rivals in Pfizer , which sells Solu-Medrol to treat MS, and Lundbeck's Sabril for infantile spasms. The company also suffered another scare when it was initially but incorrectly reported that Cerium Pharmaceuticals had its infantile spasm drug approved by the FDA. In fact, it was only granted orphan drug status, but it's most definitely not approved for that indication. What it does show is that there will always be someone knocking at the gates and investors need to be mindful of that.

As for pricing, others like Gilead Sciences Seattle Genetics , and Bristol-Myers Squibb have all dealt with significant pushback when the price tags on their treatments for rare or little-treated illnesses have seemed too high.

Remember this
When even Citron Research says investor reaction is overwrought as it did on the Cerium confusion -- though the overall opinion on Questcor hasn't changed -- it may mean the biotech has more ground yet to retrace. Let me know in the comments section below whether you think this current one-trick pony can still win down the homestretch.

Questcor is one of the most debated names in all of biotech. Acthar is growing at a torrid pace -- and minting money in the process. However, recent events have created significant doubts about Questcor's future. We highlight these high-profile issues inside our brand new premium research report on Questcor. In it, you'll learn about the key opportunities and threats facing the company, as well as multiple reasons to buy and sell the stock. We're providing a full year of analyst updates as key news hits, so make sure to claim a copy today by clicking here now.

The article Questcor Pharmaceuticals: Underdog or Just a Dog? originally appeared on Fool.com.

Fool contributor Rich Duprey owns shares of Pfizer. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Gilead Sciences and UnitedHealth Group. 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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