(MONEY Magazine) – Five years ago, Linda Zimbalist Smith left her job as an analyst at First Boston to start a brokerage and securities research business with her husband William. Since then, the firm has attracted a loyal following of 50 top money managers. Linda, 35, the sole analyst for the firm, specializes in identifying stocks that are undervalued, according to measures such as the value of a company's assets or the amount of cash it generates. As of January, eight of the 31 stocks that she recommended during the past three years had more than doubled, and 11 others rose between 9% and 92%. While her husband oversees a three-member staff in New York City that markets the firm's research, Smith divides her time between offices at home in Greenwich, Conn. and at the couple's nearby brokerage. She also squeezes another job into her day, as mother of the couple's three-year-old toddler, Brian. Although she starts her analytical work at 5 a.m. and logs in another two hours after her son goes to bed at 8 p.m., Smith thrives on the schedule. ''The balance keeps me sane,'' she says. ''I don't think I'd enjoy either my career or motherhood as much if I were doing either exclusively.'' From 1979 to 1982, Smith managed the investment portfolio of First Boston's arbitrage department, the division of a brokerage that trades the shares of companies that have become takeover targets. The key to successful arbitrage is the ability to determine how much a company's assets would be worth to an acquirer or how much a company's stock would rise after a restructuring. One way a company tries to escape a takeover attempt is by boosting its share price -- often by selling assets, buying back stock or cutting costs to increase net income -- and thereby pricing itself out of danger. Smith uses arbitrage analysis to find undervalued issues. Sometimes the stocks she spots are acquired eventually. But even if they are not, their rich asset value often translates into higher stock prices as investors come to realize the companies' true worth. ''The best recommendations,'' she says, ''are the ones where you correctly anticipate a change in investors' perceptions of a company's value.'' In December 1984, for example, she recommended ABC, which was trading at a depressed $57.25 because investors feared the company would report poor earnings. But Smith figured the stock was really worth $105 a share because of the value of the company's broadcasting franchise and its strong cash flow. Two years later, Capital Cities acquired ABC at a price of $122 a share. Smith is currently neutral on the market as a whole. Because of deterioration in the economy, she believes it is unlikely that the Dow Jones industrials will rally back to their August high of 2722, and she expects the Dow to trade between 1800 and 2200 during the next six months. Right after the October crash, many of the stocks she follows appeared excessively undervalued, she says. But since the Dow has rallied 170 points from its low, Smith's buy list now focuses on a select group of fewer than a dozen stocks. Her favorite picks are companies in the retailing industry, a sector that has been depressed because many investors fear weak consumer spending. But Smith sees considerable long-term value in some retailers' cash-generating ability and real estate. She likes Zayre (recently traded on the New York Stock Exchange at $17.50 with estimated 1987 revenues of $6.4 billion), which she figures would be worth $32 a share to an acquirer, and F.W. Woolworth (NYSE, $38.50, revenues of $7.1 billion), which would be worth $70 in a takeover. Among other favorites, she mentions Primerica (NYSE, $26.75, revenues of $3.7 billion), a financial services company. Based on the company's plans to sell four divisions and a possible share-repurchase program, she values the stock at $35 a share, or only nine times estimated 1988 earnings. She also recommends Textron (NYSE, $24, revenues of $5.3 billion), an aerospace conglomerate with a value of $50 a share based on a planned divestiture program; American Medical International (NYSE, $13.50, revenues of $2.7 billion), a health-care company with a value of $23 a share to an acquirer, and Lockheed (NYSE, $38.50, revenues of $11 billion), an aerospace manufacturer, which she estimates would be worth $75 a share in a takeover. Comparing her roles as analyst and mother, Smith says she finds her son a refreshing distraction from her spreadsheets. ''He's actually a lot of fun at this age -- I never expected that.'' Brian is already showing an analytical cast of mind. Says Smith: ''His favorite question is 'Why?' and he loves playing with my computer.''