(MONEY Magazine) – You've just read that small-cap value funds are the smartest route to outsize gains in tiny stocks. At first glance, however, the small-company growth portfolios known as momentum funds (because they invest in firms posting explosive earnings gains of 25% or more) might also seem to be tempting buys. After all, many have plunged 30% or more from their peak in May of last year. For example, $119 million Dreyfus Aggressive Growth gained a staggering 50.9% the first five months of last year, only to free-fall 35% over the next 12 months.

But if you're considering investing in such funds now because you expect a quick rebound, we have one word of advice for you: Don't. The main reason: Despite the carnage these portfolios have suffered over the past year, the stocks they own are still high priced and risky. "These funds aren't wildly overvalued like they were in early 1996," says Morningstar publisher John Rekenthaler. "But they're not really cheap either." For example, small-company stock analyst Keith Mullins of Smith Barney notes that an index of 175 small-cap growth stocks he tracks hit an average price/earnings ratio of 22 times the stocks' previous 12-month earnings in April. That's down 35% from the average P/E of 34 a year earlier but still 38% above the 16 times earnings that these shares traded at during 1990's bear market. Both Rekenthaler and Mullins believe small-growth issues could sink to those bargain-basement P/Es again, especially if the stock market falls 15% or so between now and the end of the year as MONEY's Wall Street editor Michael Sivy expects. "Before I get excited about buying these funds, I would want to see them get down closer to the levels they hit in 1990," says Rekenthaler.

--Jerry Edgerton