NEW YORK (CNN/Money) - This year is shaping up to be a repeat performance of the past two years. And while that's bad news for most investors, it's cause for celebration for those who got in early on the small cap rally.

Small value stocks in particular were winners in 2000 when little else did well. Ditto for last year. And while the Dow, S&P 500 and Nasdaq are all sitting on year-to-date losses, the Russell 2000 Value Index is up more than 14 percent through May 3. This index includes plenty of little companies in slower growth industries like financial services, industrials and consumer products.

The Russell 2000, a mix of small cap growth and value stocks, is also up for the year. But that's only because of small value's performance. The Russell 2000 Growth Index is down 4.9 percent year-to-date and also declined in 2000 and 2001. That's because there were many hard-hit technology and Internet stocks in the index.

Funds specializing in small cap value stocks are up 11.7 percent for the year. (Precious metals, natural resources and real estate funds are the only domestic fund classes doing better.) So is the small value bull market nearing its end or can small value continue to lead the way?

Lawrence Creatura, manager of the Turner Small Cap Value Fund, thinks that as long as the overall market remains tumultuous it bodes well for small cap value stocks. He says that small stocks, and small value in particular, have been able to benefit in this jittery environment because the companies' business models and balance sheets tend to be easy to understand.

"Accounting is relatively clean compared to large companies. There are not a lot of financial shenanigans going on," Creatura says.

No bear market for small value       Small value stocks have been the best performers for almost two and a half years. • Russell 2000 Value: up 52.0% • Russell 2000: up 1.4% • Dow Jones Industrials: down 13.0% • S&P 500: down 26.9% • Russell 2000 Growth: down 33.5% • Nasdaq: down 60.4% Performance from Dec. 31, 1999 through May 3, 2002.

Buzz Zaino, manager of the Royce Opportunities Fund, says that even though small financials and cyclical stocks have already enjoyed a nice run over the past few months in anticipation of an economic recovery, he thinks that they can continue to do well for the next six months to a year because earnings growth will be strong.

With this in mind, what are small cap value managers looking at? The answers are slightly surprising. Jean-Pierre Conreur, manager of the Tocqueville Small Cap Value Fund, says one-third of the stocks in his fund are expected to lose money.

"That doesn't bother me as long as companies are losing money for the right reasons and investing in themselves," Conreur says. It shouldn't bother investors too much either. The fund is up 8.1 percent year to date and has an average five-year return of 17.9 percent.

So instead of price-to-earnings multiples, Conreur says he prefers to use price to sales ratios to find value, specifically looking for stocks trading at less than one times sales for the trailing 12 months.

An example is Unova (UNA: Research, Estimates), Conreur's top holding, which makes bar code equipment for industrial suppliers as well as machinery for the automotive industry. The company is expected to report a loss of 64 cents a share in 2002. But its market value is just $415.4 million, less than a third of last year's sales of $1.4 billion.

In fact, other managers also said earnings ratios weren't much of a factor in their buying decisions. "Earnings are not only the most volatile number in the income statement but are also subject to the most engineering. Price to sales is a much purer number since sales are at the top of the income statement," says Creatura. His fund is up 9.5 percent year to date and has returned an average of 20.1 percent over the past five years.

Two consumer-oriented stocks that Creatura likes are Briggs & Stratton and Callaway Golf. Briggs & Stratton (BGG: Research, Estimates), which makes engines for lawn mowers and other garden equipment, has a market value of $893 million and trades at just 0.7 times last year's $1.3 billion in sales . Callaway (ELY: Research, Estimates), maker of the popular line of Big Bertha golf clubs, is pricier at 1.7 times trailing sales, with a market value of $1.4 billion and sales of $811.2 million. But Creatura says the company is almost like a stealth technology company, since it spends heavily on research and development for new products.

And some small value managers like bona fide technology companies. Tech and value in the same sentence? "There are plenty of small technology companies with strong balance sheets and tons of cash. Rip off the cover of their 10-Ks and hand them to a Graham and Dodd person and they would salivate," says Zaino, referring to the two men widely acknowledged as the fathers of value investing, Benjamin Graham and David Dodd.

As a matter of fact, the top holding in Royce Opportunities as of April 30 is Standard Microsystems (SMSC: Research, Estimates), a company that makes circuits for the motherboards of personal computers. This stock is not a value stock by traditional methods, trading at more than 113 times earnings estimates for fiscal 2003. But Standard Microsystems has $126.7 million in cash and short-term securities and no debt. Royce Opportunities is up 13 percent year to date and has a five-year average return of 22.1 percent.  

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