(MONEY Magazine) – The generals are leading, but the troops aren't following. No, I'm not talking about a mutiny in the military; I'm referring to the mutiny in the stock market. Since mid-1996, a small number of growth stocks and a narrow band of industry groups have been charging ahead, while most other stocks and sectors have been sitting in their tents.

Last year, for example, only four companies-- $19 billion (1997 estimated revenues) Coca-Cola, $85 billion General Electric, $24 billion Intel and $11 billion Microsoft--accounted for 15% of the S&P 500's 20.3% price advance, according to Birinyi Associates, a market research firm in Greenwich, Conn. The top 15 stocks--including $24 billion Citicorp, $80 billion IBM, $22 billion Merck, $13 billion Pfizer and $72 billion Philip Morris--were responsible for three-fifths of the S&P's gain.

Moreover, the market's biggest winners were concentrated in three major sectors--financial services (banks, brokerages and insurance companies), noncyclical consumer goods (manufacturers of cosmetics, household products and pharmaceuticals) and technology (manufacturers of computers and semiconductors).

Lately the winner's circle has rapidly shrunk. Since Jan. 1, the mostly large growth stocks in Standard & Poor's 500 index have gained 2.2%, while its index of medium-size companies has fallen 1.9% and its small-company index has dropped 5.8%.

The small number of winners explains why most professional money managers and individual investors haven't kept up with the S&P 500. As a group, diversified equity funds have lagged the index by nearly four percentage points since the start of the year. That's a huge deficit compared with the funds' average annual one-point shortfall during this 6 1/2-year bull market.

In sum, if you haven't taken outsize risks by investing all of your portfolio in growth stocks, you have been penalized. However, don't make the mistake of abandoning prudence now. All investment cycles come to an end, as the recent market drops have reminded investors. Investors are beginning to realize that growth stocks, which have spurted 80% since Jan. 1, 1995, are now burdened with extremely high price/earnings ratios--an average of 24 or higher, vs. the market's 17.

In recent weeks, shares of big technology firms--which are the quintessential growth stocks--have fallen 15%. Tobacco stocks have tumbled 20% from their highs because of fresh concerns over the potential impact of smoking-related lawsuits on the industry. Even financial services shares have fallen 10%, as investors have become more worried about higher interest rates and rising consumer-loan delinquencies.

As a result, I think that your best investments now may be value stocks--shares of companies that are out of favor, usually because of temporary business setbacks. My studies indicate that growth-stock prices are currently about 20% higher than normal relative to value stocks. I'm not saying that growth stocks are poised to drop 20%. The overall stock market may still go up. But the imbalance between growth and value-stock prices suggests that the market's new leaders will most likely be value stocks. After all, although they have badly trailed growth stocks for more than two years, during the past 20 years value-share prices have gained nearly as much as growth stocks.

The economic fundamentals are also changing in favor of value stocks. The business expansion is picking up steam, and I don't expect it to be slowed significantly by the Fed's quarter-point increase in interest rates. Industrial commodity prices have started to rise. Moreover, low inventories of such basic materials as aluminum, chemicals, copper and steel suggest that prices will continue to climb.

As those prices rise, so should the shares of companies that produce commodities and fabricated products. I therefore think that investors might consider the shares of $13 billion Alcoa and $8 billion PPG Industries, both of Pittsburgh, as well as Sonoco Products, a $3 billion packagemaker in Hartsville, S.C.

Energy-related companies are also high on my buy list. San Francisco's $46 billion Chevron and Dallas' $8 billion Dresser Industries stand to benefit from the 10% to 15% increase in oil and gas prices that I forecast for the next 12 months.

The telecommunications sector is another value-laden group. Many investors fear that deregulation of the industry may lead to destructive competition. But I believe Chicago's $16 billion Ameritech, $21 billion BellSouth of Atlanta and $22 billion GTE of Stamford, Conn. can prosper, because they offer efficient local phone service and value-added services that consumers want, such as call waiting and caller ID.

Last, you might shop for bargains among the growth stocks' fallen angels. My three top choices for growth on the cheap are $8.5 billion Sun Microsystems of Mountain View, Calif., a provider of computer-networking hardware, software and services; $7 billion WorldCom, a Jackson, Miss. provider of telecom and Internet services; and $33 billion PepsiCo, a beverage and snack giant in Purchase, N.Y. Their share prices have recently been battered down to reasonable levels. Despite investors' worries about the companies' competitive positions, I believe their financial and management strengths will provide the edge needed for returns of 25% or more in the next year.

James R. Solloway is co-president and director of research at Argus Research in New York City and columnist for Money's monthly newsletter, Retire with Money. (To subscribe, call 800-284-5300.)