Above my desk hangs a huge wall calendar with important dates circled in red, marking earnings conference calls, noteworthy

IPOs and the occasional appointment with a CEO or venture capitalist kind enough to meet with my small firm.

Mostly though, scribbled in here and there are grisly particulars of ill-fated stocks that dropped precipitously in a single day, setting up interesting future value plays. I am chief investment officer of a capital management firm, and we keep a constant vigil for rare and unfairly battered equities, some of which wind up in our model portfolio, called Best Undervalued Growth Stocks, or BUGS.

On Aug. 4, 1998, shares of

Rexall Sundown

(RXSD)

, maker of vitamin, nutritional supplements and consumer health products, plunged 7 1/8, or 24%, to close at 22 3/4 on heavy volume. The catalyst for this selling climax was competitor

General Nutrition's

announcement that it would cut prices on such basic staples as vitamin C by up to 40%. Fearing a price war, Wall Street promptly sold off the entire group, dumping not only Rexall Sundown but shares of

Twinlab

(TWLB)

and

Usana

(USNA) - Get Report

as well.

Remembering that Rexall Sundown sold its products through mass-market retailers, like

Wal-Mart

(WMT) - Get Report

, independent distributors and mail order, while General Nutrition had some 3,700 retail stores to support, I mistakenly assumed this was purely a sympathetic dip from which Rexall Sundown would very quickly bounce back.

After all, this was a stock our firm was familiar with: It occupied a slot in our "Best Guess 2003" long-term model portfolio. At the time, the Boca Raton, Fla.-based company enjoyed three-year compound annual growth rates in sales and earnings of 32% and 52%, respectively, ever-thickening net profit margins of 13%, increasing positive operating cash flows and a return on equity of 27%.

Fundamentally, the company looked solid. With an estimated 10,000 Americans turning 50 every day and providing great demographics, and vitamins being the fastest growing category within the food, drug and mass market's health and beauty care segment, Rexall had come a long way. Its top-line results grew eleven-fold, from $24 million in the 1988 fiscal year to $263 million in the 1997 fiscal year. By marketing the likes of Metab-O-Lite, Ginseng, Gingko Biloba, Echinacea Complex, Saw Palmetto, St. John's Wort and the Glucosamine and Chondroitin formula Osteo-Bi-Flex (its first nationally advertised new product), Rexall had prospered alongside its core market of newly joint-creaking baby boomers.

So, indeed, Rexall Sundown had all the makings of a good BUG stock pick as well! Nevertheless, while I added Rexall Sundown's name to the long litany of other smashed-up stocks we follow, I resisted the urge to buy immediately, adopting a wait-and-see attitude instead. Hard-won experience has shown that with most potential BUGS the other shoe invariably drops as more bad news leaks out.

True to form, three months later, on Nov. 5, 1998, Rexall Sundown shares suffered another 41% shocking slide after management revealed first-quarter results would come in well below analysts' expectations, due to a general slowdown in the industry.

Watch Out for the Relapse
Often when a stock dips, as Rexall Sundown did in August 1998, it pays to wait for the other shoe to drop.

With virtually no long-term debt and nearly $100 million in cash and marketable securities, it came as little surprise when the company started buying back its shares in the open market -- always a good sign. As the months passed, Rexall Sundown shares rallied sharply in March 1999, yet I still felt not enough time had elapsed. Later, with prices bottoming around 9 1/2 that autumn, the stock looked down for the count with a poor relative strength (RS) rating, as measured by

Investors Business Daily

.

Finally, after 20 months of watchful waiting, it was time to pounce as conditions at last seemed perfect: RS had decisively firmed, revised analyst earnings upgrades outnumbered downgrades 6 to 1, and the stock was still selling at a 60% discount to its all-time high.

Faster than you can suck down a cold-fighting zinc lozenge, we added Rexall Sundown to our BUGS model portfolio on April 3, 2000, at 15 3/16 a share. (Our model portfolios are managed accounts in which we invest our clients' money. Any difference in our clients' account starting dates can, and often will, produce materially different results for different clients.)

Just one month later, on May 1, Rexall Sundown shares soared to 23 7/16 on news of a $1.8 billion takeover bid from a Dutch firm,

Royal Numico

, which had earlier snapped up General Nutrition. With a mix of surprise, delight and, yes, some disappointment (our turnaround price target was higher), we waited a short time for a second bidder to appear -- none did -- before exiting our position on May 8 at 23 9/16, seeking to better redeploy capital elsewhere. Still, we did manage to bag a quick 55% profit with this one-month BUG trade. Daytraders and other fast-money players would do well to consider the advantages of such patient observation, detailed record keeping and tax-friendly low turnover.

Are there any other potential BUGS slowly working their way back toward a highly profitable turnaround or friendly takeover bid? Of course! Keep an eye, for example, on the progress of

Central Parking

(CPC)

,

Dave and Busters

(DAB)

and

Centex Construction Products

(CXP) - Get Report

. New BUGS are slowly being hatched all the time. Good hunting!

James Brookes-Avey is chief investment officer of

MomentumInvesting.com, a small investment advisory based in Scottsdale, Ariz. At the time of publication his firm had no position in Rexall Sundown, Central Parking, Dave & Busters or Centex Construction Products, 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

stockpix@aol.com.