(FORTUNE Magazine) – It's been a long time since smoking was as romantic as Paul Henreid made it in Now, Voyager. But even to an industry that's been fighting liability suits since 1954, the current wave of tobacco bashing feels unusually ferocious. On March 13, jaws dropped when Bennett LeBow, who controls the cigarette maker Liggett Group and who also happens to be vying for control of tobacco and food giant RJR Nabisco, offered to settle some claims for smoking-related damages.

Though LeBow's proposed settlement amounts to a modest $31 million, to be paid over 25 years, it was the first time anyone in the industry had settled anything. Investors, fearing that the offer is a harbinger of things to come, dumped tobacco shares. The stocks tumbled further on March 18, when three former Philip Morris employees alleged that tobacco companies manipulated nicotine levels. Together, the blows knocked tobacco stocks down by more than 10%, costing shareholders some $15 billion.

Does this recent downturn spell an opportunity, or will the stocks dive even more? Until now, the periodic steep drops have usually proved to be fertile buying opportunities. Consider: Though litigation scares have threatened tobacco companies on and off for a decade, Philip Morris has produced an annualized return of 29% over that period.

But to many professionals, the threats this time around feel more ominous. Says Philip Schettewi, who manages $4 billion for Loomis Sayles: "With the recent testimony, the class actions, the Medicaid problem, the proposed Liggett settlement--there's a big cloud over these companies, and it won't blow away tomorrow."

Others are less willing to spin doom scenarios or put a number on just how bad liabilities could get, if in fact any judgments against the industry will be awarded at all. When pressed to quantify the litigation risk, Art Cecil, who has followed the industry for T. Rowe Price for 15 years, says, "You can use any number you want, from zero on up--hough at this point I'm not expecting long-term damage."

Because of the unknowns, these stocks are not the place for queasy investors. Setbacks could easily occur as more states file suit against the industry for reimbursement of Medicaid costs. But even so, for investors with patience--and nerves of steel--the slump in tobacco shares may offer a rare opportunity to pick up some terrific profit generators on the cheap. Philip Morris will make an estimated $71.5 billion in revenue this year, and $12.8 billion in operating income. Nancy Tengler, a portfolio manager for UBS Asset Management in San Francisco and a tobacco bull, points out that the industry has yet to lose a case in court; that many of the allegations remain difficult to prove; and that focus groups point to the fact that juries ultimately conclude that smokers are fully aware of the risks they take. Any good news--a decertification of a class-action suit, for instance--could lead to an instant spike in shares.

Another important factor is the loyalty of core smokers, particularly overseas. Twenty-five percent of Americans smoke--a number that is unlikely to get much lower--even though the antismoking climate is the strongest it has ever been. Abroad, where the stigma is less and the risk of litigation is not a factor, smoking rates are much higher. What's more, Philip Morris and RJR are gaining market share in international markets with American-blend brands like Marlboro and Winston. Tengler estimates that for Philip Morris, international tobacco operations account for 32% of the company's total revenue; domestic accounts for 17%. She figures the recent 17% decline in the share price has already fully discounted the entire domestic tobacco operation.

The smaller companies also offer solid numbers. Loews, with nearly $14 billion in revenue, earns most of its money from insurance, but its Lorillard Tobacco subsidiary--featuring Newport and Kent--generates ample cash flow. Shares nearly doubled last year but spilled along with the others in the recent selloff. UST, which generates $1.3 billion in revenue, is the leading maker of smokeless-tobacco products like Skoal. Recently the stock has lagged too, but it faces less litigation risk than the others.

Investors must find the balance between fear and greed: There's near-term price risk and a guarantee of controversy. Worse, the current problems could mushroom. But for those willing to gut it out, the stocks offer a tempting contrarian play--not many have lost betting on Philip Morris in the past. The thorny dilemmas, however, are enough to send investors groping for a smoke.