Usually when I write a case study for the

, I chronicle from start to finish an investment in my firm's "Best Undervalued Growth Stock" (or BUGS) portfolio. I thought this time readers might like to judge an investment for themselves while the story is still unfolding -- a BUGS saga whose last chapter has yet to be written.

As chief investment officer of a small investment advisory firm, I study scores of such works-in-progress, potential BUGS, all the time -- some more promising than others. Not all will eventually go on to become full-fledged BUGS, earning a place in our model portfolio. Some may rebound or get bought out before our algorithm finally flashes


. Here's a potential BUGS pick we've been tracking for a long time but have yet to take a position in. What do you think of its prospects?

Just over a year ago, shares of Dallas, Texas-based

Dave & Buster's


, a chain of large, upscale restaurant and entertainment complexes, crashed. On the last lazy Friday in August 1999, D&B shares plunged from $24.88 to $13.75 (some 45%) following an earnings warning. Management announced a 2.2% decline in same-store sales (brought on by weak performance at the company's three Southern California restaurants and unusually mild weather) would result in second-quarter earnings per share of between 14 cents and 16 cents, far short of the 28 cents analysts were expecting. Even worse, this would be below the 21 cents D&B earned in the same period during the previous year.

Dave & Buster's shares plunged following a 1999 earnings warning and have only recently begun to recover.

Source: BigCharts

Until the selling climax, Dave & Buster's had been a notable success story. Since its founding in 1982 by co-CEOs David Corriveau and James "Buster" Corley, the company's mix of casual food, drinks and a dizzying array of games for adults (pocket billiards, shuffleboard, virtual reality and carnival-style tests of skill) was a hit with fun-starved yuppies. Led by

Montgomery Securities

, Dave & Buster's went public in June 1995, split three for two in 1997 and moved onto the

New York Stock Exchange

two years later. Along the way, D&B shares had prospered, buttressed by impressive three-year compound annual growth rates ranging from 45% to 51%.

Now, though, there was finger-pointing, investor skepticism and the raised specter of another good-idea eatery gone bad, like

Boston Chicken


Planet Hollywood

. The company moved swiftly to allay such fears, dismissing general managers at its Ontario, Irvine and Orange County, Calif., restaurants, as well as the manager of that region. The number of new store openings planned for the year was cut, from eight to four.

Watching and Waiting

Impressed by management's commitment and the strength of its past earnings momentum, we added D&B shares to our watch list of potential BUGS to track, resisting the Pavlovian response to buy on the first dip. Such caution was merited. The other shoe dropped on Dave & Buster's just 15 weeks later, in December 1999, when upon delivering another earnings disappointment, D&B shares further collapsed from $9 to $5.81 (or another 35%). Earnings per share came in at just 2 cents, not the already-reduced target of 18 cents Wall Street was expecting.

In the spring months that followed, management apparently began to turn things around. We reread the annual report and listened to the occasional conference call, posing some useful (we hoped) questions for the co-founders' response. A number of actions gave existing shareholders hope: Store operations were improved; insiders bought shares; radio and TV advertising began to support word-of-mouth, and a $110 million revolving credit facility was established with

TST Recommends

FleetBoston Financial

to refinance the company's debt.

We continued to bide our time, ignoring the rise in D&B shares in March and April, which we felt was premature. D&B's relative strength (as measured by

Investor's Business Daily

) remained stubbornly low. Finally though, after four disappointing quarters, the company at last delivered some undeniably good news. For the second quarter ending July 30, 2000, revenues rose 35% and earnings per share of 17 cents beat estimates by a penny. On rising trading volumes, D&B shares immediately jumped above their 50-day moving average.

The Case for D&B

So, is now the time to finally jump into Dave & Buster's and ride its rebound? Perhaps. On the plus side, this potential BUGS at no time ever actually lost money during its turnaround phase. Earnings, albeit greatly reduced, continued to pile in as the turnaround unfolded, a hallmark of a good BUGS pick. Overseas licensing agreements have added to the total market opportunity. New games have refreshed the customer experience. Selling today for around $8.13, D&B shares are still 70% off their 52-week high. They come with a

price-to-earnings ratio of 12, a

PEG of 0.33 and trade at just 3.5 times

cash flow.

On the negative side, the debt remains -- some $98.8 million. Not a huge amount, and one probably easily handled by D&B's positive cash flows. Yet the best BUGS are those depressed-price companies whose balance sheets are awash with cash and have little or no long-term debt and thick after-tax profit margins.

To reiterate, our firm's BUGS model portfolio has no position in Dave & Buster's at this time, yet clearly it is on our radar screen. (Our model portfolios are managed accounts in which we invest our clients' money. Any difference in our clients' account starting dates can produce materially different results for different clients.) A full year of dead-money time has now elapsed. As a budding BUGS hunter yourself, what would you do now? Take the plunge, or wait for a better opportunity to come along?

Dave & Buster's next quarter's comparisons should be extremely favorable (an estimated 15 cents vs. just 2 cents for last year's third quarter). Will this be enough to jolt D&B shares decisively back toward the $20 price range and perhaps beyond? Have the valuations become so compelling that fund managers would be remiss not to open positions? Will

Greenspan's earlier hiking of interest rates serve to cool off the economy in what has traditionally been Dave & Buster's strongest season? Or are its margins too thin to stage any lasting recovery?

Tell us what you think. Last year after the stock blew up,

Jim Cramer

asked readers about their D&B experiences.

Read their responses before voting in our poll. And let's all keep an eye on this case study to see how it finally plays out. Good luck!

Is it time for a turnaround at Dave and Buster's?

Yes, it's hard to ignore the valuations.

No, it's still too early to tell.

James Brookes-Avey is chief investment officer of, a small investment advisory based in Scottsdale, Arizona. At the time of publication his firm had no position in Dave & Buster's although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Brookes-Avey's writings provide insight into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice, he invites your feedback at