By Shelley Neumeier

(FORTUNE Magazine) – Small-cap funds are hot. And some experts say that even after two years of strong performance, this rowdy bunch still has room to move up. But with more than 100 funds to choose from, where do you begin?

One way is to separate the funds that pursue value from those that go for growth. Think of yourself as having to choose between a cheap, used Honda and a Ferrari. The Ferrari may give you a hell of a ride, but if it crashes, ouch, it will cost you a lot. Crash the Honda, and you pay much less. Value managers look for stocks that have low price/earnings ratios, sell near or below book value, and generate above-average yield. Growth managers focus primarily on fast earnings increases, commonly insisting on annual growth of 20% or more. They pay a premium for such performance if they think it can be sustained, and comb such sexy sectors as technology, restaurants, and specialty retailing to find it. The average five-year growth rate of stocks in the John Hancock Special Equities fund is 27%, but manager Michael DiCarlo paid some 31 times this year's earnings to assemble the portfolio. When times are good, taking on the risk of high multiples can be rewarding: In 1991, as the S&P returned an impressive 30%, small growth stocks charged ahead 57%, eight percentage points more than their value-oriented siblings, according to Wilshire Asset Management in Santa Monica, California. But in the infamous fourth quarter of 1987, when the S&P dropped 23%, small growth stocks lost 28%, while small value stocks fell only 16%. Claudia Mott, director of small-cap research at Prudential Securities, compared the performance of the two groups of funds since 1980. Small-cap growth stocks, she says, do better when the economy is tanking: Investors flock to companies likely to generate earnings gains in spite of hard times. But when the economy stirs, value stocks blossom. Such an upturn, says Mott, is why small-cap value funds thrived last year, when value returned 19%, vs. growth's 7%. This year, as the recovery unfolds, Mott expects the value group to continue to prosper. Of course, some people don't consider what we're in now to be much of a recovery. Contends John Hancock's DiCarlo, whose growth fund returned 25% in the 12 months ended in January: ''It's going to be another big year for small- company growth stocks.'' Among his favorites: Marvel Entertainment, a comic book publisher that saw profits bulge 80% in 1992. It trades for 22 times estimated 1993 earnings, which are expected to be up another 50%. Pow. DiCarlo also favors Cisco Systems, a producer of software for computer networks. At $88 a share, the stock trades for 35 times his 1993 earnings estimate. Profits will rise 32% next year, he says. Jim Oberweis, manager of the Oberweis Emerging Growth fund, likes health care stocks such as Pyxis, a company whose products help automate the filling and filing of prescriptions $ in hospitals. Pyxis sells for a mighty 44 times estimated 1993 earnings, but Oberweis expects earnings per share to jump 45% next year. Value fund managers wouldn't come near stocks like that. At the FAM Value fund, co-manager Diane Van Buren generally rules out any stock with a P/E greater than 14. Says she: ''The higher you go, the farther you fall.'' She looks for cheap companies with consistently high returns on equity, such as Modern Controls, a Minneapolis manufacturer of testing instruments. Bill Nasgovitz of the Heartland Value fund prefers companies sensitive to the economy and with nowhere to go but up. Example: Attwoods PLC, a depressed British pollution-control company. Its American depositary shares trade for $10, or 12 times estimated 1993 earnings. Often, a stock shifts between the growth camp and the value camp as its company's fortunes flow and ebb. In 1989, Varitronic Systems, a labeling- machine maker, carried a P/E of 22 and was considered a hot grower, says Nasgovitz. But when the company bet on a bum product that year, its earnings -- and stock price -- sank. Now the business is turning around, and the stock fits Nasgovitz's value criteria. At $8, Varitronic trades for slightly above book value, or ten times estimated 1993 earnings per share.